C$ near two-week low as Carney speech weighs

TORONTO: The Canadian dollar hit its weakest level in nearly two weeks against its US counterpart on Tuesday, after a Bank of Canada speech omitted mention of a long-stated intention to raise interest rates once conditions permit.

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."

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 Oct. 23 interest rate decision or abandoning the monetary tightening bias altogether.

But the currency slid overnight as traders decided the event was a dovish signal.

"It pretty much wrung out any rate expectations that were in place for next year," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada. "There was a bit of a delayed reaction in currency markets."

RATE HIKE BETS PULLED

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.

"Clearly the market is still reacting to the comments from Carney yesterday. That's continuing to weigh on the Canadian dollar," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London.

By 10:49 a.m. (1449 GMT) the Canadian dollar was at C$0.9854 to the US dollar, or $1.0148, compared to C$0.9800, or $1.0204, at Monday's North American close. It hit C$0.9880 in early trade, its weakest level since Oct. 3.

The currency won back some value after strong Canadian factory and investment data.

Canadian manufacturing sales rebounded much more sharply than expected in August after a two-month slump, on the back of a resurgent energy sector.

Foreigners upped their interest in Canadian securities in the same month, investing almost C$7 billion with a focus on corporate bonds and money market instruments.

A trend toward investment in Canada is supportive of the Canadian dollar.

BOND PRICES WEAKER

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 US Treasuries.

The two-year bond lost 1 Canadian cent to yield 1.085 percent, while the benchmark 10-year bond fell 20 Canadian cents to yield 1.819 percent.

The sudden resignation of Ontario Premier Dalton McGuinty had little impact on the price of the province's debt. The yield on Ontario's 10-year bond traded 94 basis points above its Canadian government counterpart, little changed from Monday.

RBC's Chandler ascribed the lack of reaction to government forecasts earlier on Monday showing Canada's most populous province is reducing its budget deficit faster than projected.