CANADA FX DEBT-C$ hits February high after U.S. interpretation calms rate fears

Fri Feb 19, 2010 4:55pm EST Related News CANADA FX DEBT-Canadian dollar pares loss after U.S. dataFri, Feb 19 2010CANADA FX DEBT-C$ sags on U.S. Fed"s discount rate riseFri, Feb 19 2010CANADA FX DEBT-C$ shines on inflation data, foreign investmentThu, Feb 18 2010CANADA FX DEBT-C$ rises on inflation data, firmer oilThu, Feb 18 2010CANADA FX DEBT-C$ slumps as U.S. data, Fed lift greenbackWed, Feb 17 2010

* C$ hits February high at 96.26 U.S. cents * Highest against euro since Oct 2007 * Bonds drop as rate, inflation fears linger By Claire Sibonney TORONTO, Feb 19 (Reuters) - The Canadian dollar hit itshighest level against the U.S. currency in nearly a month onFriday after U.S. inflation data showed prices rose less thanexpected, calming markets made jittery by Thursday"s surprisehike in the U.S. discount rate. The U.S. Federal Reserve said late on Thursday it wouldincrease the discount rate to 0.75 percent from 0.50 percent,effective Friday, although it left the benchmark federal fundsrate, its main policy tool, unchanged near zero.[ID:nSGE61I036] The move pushed the U.S. dollar higher on speculation that the Fed could move sooner than expected to raise itsbenchmark rate. But U.S. data on Friday that showed consumer pricesexcluding food and energy fell in January for the first timesince 1982, supported the Federal Reserve"s contention that itwould keep its benchmark interest rate low for an "extendedperiod", weakening the greenback again. [ID:nN19117929] "The Canadian dollar"s had a great North American session.Obviously there was a lot of chaos overnight with the Fedhiking the discount rate unexpectedly," said Steve Butler,director of foreign exchange trading at Scotia Capital. ."The outlook is still very favorable for Canada goingforward." The price of oil, which often influences the Canadiandollar, rose toward $80 a barrel as refinery strikes in Franceand tensions about Iran"s nuclear program raised concerns aboutsupply. [O/R] Gold also reversed early losses, which further supportedthe commodity-linked currency. "Commodities in general are a little bit better today but Ithink the market is paying a little less attention," saidButler. "It should be paying a little less attention to theintraday swings in some of the commodity markets and focusingon the fact that the fundamentals in the Canadian economy aresteadily improving," he said. "Against the global backdrop ofeverything else that"s going on around us, Canada seems to be arelatively safe place at the moment." The Canadian dollar closed at C$1.0405 to the U.S. dollar,or 96.11 U.S. cents, up from Thursday"s close at C$1.0414, or96.02 U.S. cents. Earlier, the currency hit C$1.0388 or 96.26U.S. cents, its highest level in nearly a month. It had weakened as low as C$1.0531, or 94.96 U.S. centsearlier, under pressure from the Fed"s discount rate hike. The Canadian dollar was one of the top performing majorcurrencies on Friday, reaching its highest against the eurosince October 2007 at C$1.4095. CANADIAN BOND MARKETS WARY Still dazed by the Fed move and Thursday"shigher-than-expected domestic inflation data, Canadiangovernment debt prices dropped, with additional pressure fromstronger equity markets. A softer reading on U.S. inflation did little to boostsentiment, as analysts read into the details more closely,particularly the influential 2.1 percent decline in the priceof lodging away from home. "Parts of the U.S. had unseasonably cold weather, but alsoif you remember back to the Boxing Day bomber, there was alittle bit of a security clampdown, a little bit of nervousnesswhich may have dampened some travel within the U.S. itself,"said Tom Nakamura, a fixed-income portfolio manager at AGFInvestments. "We think that may turn out to be a fairly temporary thingso we"ll watch that." Nakamura said investors are also still concerned aboutextraordinary monetary policy, such as near-zero interest ratesand liquidity measures, that will need to be unwound. "The timing and the pace surrounding that is a big questionmark and that question mark leads to a lot of uncertainty inthe markets and the risk is that we do find ourselves leavingliquidity measures too long or keeping rates too low, whichwould fuel inflation pressures down the road," he said. The two-year Canadian government bond CA2YT=RR was off 4Canadian cents at C$100.205 to yield 1.396 percent, while the10-year bond CA10YT=RR fell 6 Canadian cents to C$101.970 toyield 3.499 percent. Canadian bonds lagged their U.S. counterparts, with thedifference between 10-year yields narrowing about 3.1 basispoints from Thursday. In new issue news, the province of Nova Scotia added C$250million in a reopening of bonds due June 1, 2041.[ID:nN19143020] (Reporting by Claire Sibonney; editing by Jeffrey Hodgson)

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