UPDATE 2-Canada plans euro bond to diversify forex reserves

* Issue will be in 10-year range: lead manager

* Seen as effort to stay on radar of global investors

* Analysts say not a harbinger of intervention

* Seen as subtle shift away from U.S. dollar (Adds analyst comment, background; changes dateline from London)

By Jennifer Kwan and Louise Egan

TORONTO/OTTAWA, Jan 5 (Reuters) - Canada said on Tuesday it plans to issue a euro benchmark bond, its second foreign bond of the fiscal year, to further diversify financing for its foreign currency reserves.

The deal is being lead managed by BNP Paribas, Credit Suisse, Deutsche Bank and HSBC. It will be a 10-year issue, a banker at one of the lead managers said. It is expected to be priced later this week, most likely on Thursday, a second banker added.

Canadian Finance Minister Jim Flaherty said in a statement that the euro bond issue would launch in the near future, subject to market conditions. A spokesman confirmed it will be benchmark size, at least 1 billion euros.

The deal will finance the Exchange Fund Account, which Canada uses to manage the Canadian dollar’s value and foreign currency liquidity.

Analysts downplayed the possible currency market implications of the deal, and said it was more about staying on the radar of international bond investors.

“We’re just seeing a general diversification of foreign currency reserves,” said Mark Chandler, head of Canadian fixed income and currency strategy for RBC Capital Markets in Toronto.

“It’s not related to a view on currency movements,” he added.

Canada did not issue a foreign-denominated bond between early 2001 and late 2009, largely because it was running budget surpluses and had an ample outstanding balance of foreign-denominated debt from earlier auctions, Eric Lascelles, chief economics and rates strategist at TD Securities, said in a note to clients.

“The sudden return to deficits in Canada has made for a natural catalyst, and has encouraged a return to foreign-denominated issuance in an effort to keep foreigners familiar with -- and thus receptive to -- the Canadian product,” he said.


Lascelles said market players should not assume the Bank of Canada is about to step into currency markets. Last year the central bank hinted at the prospect of intervening to slow the rise by the currency, which shot to a 2-1/2 month high against the U.S. dollar on Tuesday. [CAD/]

But Lascelles noted that Canada would not need more foreign exchange reserves if it intervened to soften the currency, because it would do so by selling Canadian dollars, which would naturally add to reserves.

“If anything, the odds of near-term FX intervention against CAD are diminished rather than enhanced by this development,” he wrote.

“This latest auction announcement, along with the earlier USD issuance, should be viewed in the context of the entire developed world, which is in the process of generally ramping up the size of its foreign reserves, and subtly shifting away from USD.”

Last year, Canada completed a $3 billion, five-year bond, in a move to bolster its U.S. dollar reserves and meet International Monetary Fund obligations. [ID:nN28386471]