C$ rises global stock rally, Bank of Canada

TORONTO: The Canadian dollar ended higher on Wednesday, boosted by rallying commodities and stock markets and by a Bank of Canada statement that was not as dovish about interest rates as traders had expected.

World equity markets and commodities made strong gains, with oil up more than 3 percent, after a German court ruling supported the German government's bail-out efforts in the crisis-stricken euro zone

The euro gained 0.6 percent versus the US dollar, boosted by the German court ruling, and the dollar index fell 0.6 percent against a basket of major currencies.

"The euro is higher, it seems as though we had a rally in commodities, equities are all higher, so that's the reason the Canadian dollar is doing so much better," said David Bradley, director of foreign exchange trading at Scotia Capital.

"I think today is going to be the first day that we get a lower close than open (for the US dollar), so I think people are maybe expecting the recent trend of dollar strength to reverse itself, in the short term anyway," he added.

The Canadian currency ended the near the session high, at C$0.9855 versus the US dollar, or $1.0147, up from Tuesday's North American close of C$0.9898 to the US dollar, or $1.0103. It touched a session low of C$0.9912, or $1.0089, immediately after the Bank of Canada said it would leave interest rates unchanged but it strengthened through the day.

In a policy shift, Canada's central bank said there was less need to remove policy stimulus given slowing global economic momentum, but it also said that economic growth would resume in Canada in the second half of the year, with very stimulative credit conditions a factor.

The bank held its key interest rate steady at 1 percent, as expected.

Analysts said that while the bank noted there is less need to raise rates than it had foreseen in July, it also did not hint at any need for a rate cut.

"This might not have been quite as dovish overall as some may have been expecting, given the fact that the market was actually priced for rate cuts at some point in the months ahead," said Doug Porter, deputy chief economist at BMO Capital Markets.

Higher interest rates tend to strengthen currencies by attracting international capital flows.

Higher energy prices, boosted by expectations of lower US crude stocks, also underpinned commodity-linked currencies such as Canada's. Oil rose $3 to a five-week high, boosted by production outages in the Gulf of Mexico and the surge in equity markets.

Canadian bond prices retreated across the yield curve.

The two-year bond, which is especially sensitive to Bank of Canada interest rate moves, was off 11.5 Canadian cents to yield 0.918 percent. It yielded 0.88 percent before the rate news.

The 10-year bond slipped 29 Canadian cents to yield 2.273 percent, up from 2.248 percent before the announcement.

Copyright Reuters, 2011