Tue Oct 16, 2012 4:52pm EDT
* C$ ends at C$0.9868 vs US$, or $1.0134 * Bank of Canada omits hawkish language * Canada economic, investment data lends support * Ontario bond spreads steady after premier resigns By Claire Sibonney TORONTO, Oct 16 (Reuters) - The Canadian dollar touched its lowest level against the U.S. dollar in nearly two weeks on Tuesday and underperformed other major currencies after a Bank of Canada speech dropped any reference to the bank's long-stated rate-hiking stance. Governor Mark Carney said on Monday that the central bank would take whatever action is necessary to keep inflation on target and acknowledged the effect global uncertainty was having on Canada's resource-linked economy. But the speech omitted key hawkish language about withdrawal of "considerable monetary policy stimulus" once conditions permit. The Canadian dollar was initially little changed as analysts tried to gauge whether Carney was simply refraining from including forward-looking language ahead of the bank's interest rate decision and quarterly monetary policy report next week, or if the bank was abandoning the monetary tightening bias altogether. But the currency slid overnight as traders decided the omission was a dovish signal. "We had a very delayed reaction to Carney, which makes it suspicious," said Camilla Sutton, chief currency strategist at Scotia Capital. "However, I think it is true that Carney changed his tone from hawkish to less hawkish and implied that he would be revising forecasts and likely the tone of the statement." Sutton noted that the Mexican peso was also lagging, which pointed to a general U.S. bet against the other NAFTA currencies. RATE HIKE BETS PULLED However, pared-back interest rate expectations for Canada supported the broad view that Carney's speech was still driving markets. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders have eliminated their bets on a rate hike in 2013. The Canadian dollar ended the North American session at C$0.9868 to the U.S. dollar, or $1.0134, compared with C$0.9800, or $1.0204, at Monday's close. It hit C$0.9880 in early trade, its weakest level since Oct. 3. The currency won back some value after the release of strong Canadian factory and investment data on Tuesday. ONTARIO DEBT STEADY AFTER SHOCK RESIGNATION Canadian government bond prices were broadly lower, hurt by a rebound in appetite for riskier assets that drove North American equities higher. But Carney's speech helped boost the prices of shorter-term T-bills, and Canadian government bonds outperformed U.S. Treasuries for a second day. "That had an impact on the two-year part of the Canada curve, where we saw buyers emerge following his speech," said Claudio Ferri, senior fixed income portfolio manager at State Street Global Advisors in Montreal. "That part of the Canadian curve had been dead for weeks." The two-year bond was off 1 Canadian cent to yield 1.085 percent, while the benchmark 10-year bond fell 25 Canadian cents to yield 1.824 percent. The sudden announcement by Ontario Liberal Premier Dalton McGuinty on Monday that he would resign had only a muted impact on the price of the province's debt. The yield on Ontario's 10-year bond traded about 94 basis points above its Canadian government counterpart, little changed from Monday. Analysts attributed the lack of reaction in Ontario bond spreads to the government's fiscal update on Monday, which showed Canada's most populous province is reducing its budget deficit faster than projected. "The major worry as a debt holder, as an investor, is 'are the Liberals losing footing?' Maybe, but I don't think we've seen strong evidence of that yet," Ferri said. The news will only add to the scrutiny by investors and ratings agencies of the province's efforts to tackle its budget deficit. Those moves have included tough negotiations with teachers and health care workers over their pay. Following McGuinty's surprise news, the three major ratings agencies - DBRS, Standard & Poor's and Moody's - told Reuters that their outlooks on the province were unchanged. Moody's, which has a higher rating for Ontario than the other two agencies, downgraded Ontario's debt in April, while S&P warned it might do the same. Jennifer Wong, Moody's lead analyst on the province, said any reaction to the resignation would just be speculation. "We'd have to see whether there are any changes to the fiscal plan and whether there are any credit implications with any change in leadership."