C$ weaker after Bank of Canada holds rates steady

TORONTO: The Canadian dollar regained a little ground against the greenback on Wednesday but still ended the day weaker after the Bank of Canada said it is standing pat on interest rates, a stance that contrasts with the US Federal Reserve's moves to ready markets for a possible rate increase.

Since breaking weaker than C$1.20 to the US dollar earlier in May, the loonie has steadily lost ground, and now threatens to breach C$1.25, which would be its lowest since mid-April.

The Canadian dollar ended the North American session at C$1.2459 to the US dollar, or 80.26 US cents, strengthening from the day's weakest point of C$1.2493, or 80.04 US cents, but still weaker than Tuesday's official close of C$1.2427, or 80.47 US cents.

The currency largely brushed off the Bank of Canada's announcement that it will hold its benchmark rate steady at 0.75 percent. But some analysts questioned whether economic recovery in the United States will deliver the strong benefits to Canada that bank Governor Stephen Poloz said he expects as Canadian exports rise.

There is a not-trivial risk that growth will disappoint, said Mazen Issa, a macro strategist at TD Securities.

"We're not saying the bank is going to cut rates," he said. "But they may be way too optimistic in the growth outlook for the second half of the year."

The US dollar has gained broadly this week as traders have bet that a US rate hike is pending amid a string of upbeat economic data south of the border.

Speaking ahead of the Canadian rate announcement, the head of foreign exchange strategy at CIBC World Markets said some bets against the loonie could be pulled back if Poloz again pointed to economic recovery coming later of this year.

But dips will be bought into, CIBC's Jeremy Stretch said, because "underlying metrics still favor the US both in terms of growth and/or rate spreads."

Canadian government bond prices were flat to higher across the maturity curve, with the two-year up 3 Canadian cents to yield 0.632 percent and the benchmark 10-year up 31 Canadian cents to yield 1.672 percent.