CANADA FX DEBT-C$ weakens as Bank of Canada tone is taken as dovish

Wed Jun 4, 2014 4:35pm EDT

* Canadian dollar at C$1.0939 or 91.42 U.S. cents
    * Bond prices mixed across the maturity curve

 (Adds details, quotes, updates prices)
    By Leah Schnurr
    TORONTO, June 4 (Reuters) - The Canadian dollar weakened
against the greenback on Wednesday after the Bank of Canada said
the risks of low inflation remain as large as ever despite a
recent pick up in prices, striking a tone that was more dovish
than some in the market had hoped for.
    The loonie had weakened heading into the central bank's
policy statement in the morning, hit by data that showed an
unexpected trade deficit in April.    
    After two months of surplus, Canada posted a trade gap of
C$638 million ($585 million), while March was revised up to a
surplus of C$766 million. 
    The market's main focus for the day was on the Bank of
Canada, which held its overnight interest rate at 1 percent, as
expected. 
    But the central bank also pointed to weaker-than-expected
global growth and attributed April's rise in inflation to
largely temporary effects. The Canadian dollar touched a session
low of C$1.0956 shortly after the statement, briefly taking the
currency to a nearly one-month low. 
    "I believe the overall tone was dovish. They discarded the
recent inflationary signs, although they did comment that it
popped up a bit quicker than they had expected," said Ken Wills,
currency strategist and broker at CanadianForex in Toronto.
    The increase in the overall inflation rate to the bank's 2
percent target in April had raised some expectations that the
Bank of Canada could back off the dovish tilt it has to its
neutral stance.
    But last week's disappointing economic growth data for the
first quarter "left the door open for Governor (Stephen) Poloz
to keep his dovish tone as is," said Wills.
    The Canadian dollar ended the North American
session at C$1.0939 to the greenback, or 91.42 U.S. cents,
weaker than Tuesday's close of C$1.0910, or 91.66 U.S. cents.
    The loonie might have weakened further if it were not for
the market's attention turning to Friday's Canadian labor market
report, said Wills. Economists are forecasting the economy added
25,000 jobs last month, after unexpectedly shedding jobs in
April.
    "They're expecting a big correction on that, it could give
the loonie some footing," said Wills. "I think if we didn't have
that so close, we easily could have been comfortably through
C$1.0950 and approaching C$1.0980 today."
    Canadian government bond prices were mixed across the
maturity curve, with the two-year up 2 Canadian cents
to yield 1.064 percent, while the benchmark 10-year 
was down 10 Canadian cents to yield 2.353 percent.

 (Editing by Steve Orlofsky)
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