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Tuesday October 21, 2008 - 21:45:47 GMT
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Forex Market News - Canadian dollar skids to lowest close since 2005

 

Tue Oct 21, 2008 4:36pm EDT
 * Canadian dollar tumbles after Bank of Canada rate cut
 * Bank of Canada signals more rate cuts on the horizon
 * Bonds rally after rate cut and skid in Toronto stocks
 By Frank Pingue
 TORONTO, Oct 21 (Reuters) - The Canadian dollar skidded to
its lowest close in more than three years versus the U.S.
dollar on Tuesday as the Bank of Canada cut its key overnight
interest rate and suggested more rate cuts may be needed.
 Bond prices finished comfortably higher across the curve as
the likelihood of further Bank of Canada rate cuts and a slide
in equity markets sparked another wave of demand for secure
government debt.
 The Canadian dollar closed at C$1.2137 to the U.S. dollar,
or 82.39 U.S. cents, down from C$1.1937 to the U.S. dollar, or
83.77 U.S. cents, at Monday's close.
 The Bank of Canada's decision to lower its key rate by 25
basis points fell short of the 50-basis-point cut that many of
Canada's primary securities dealers had expected, but the tone
of the statement was enough to keep the Canadian dollar down.
 Not only did the central bank suggest it would likely cut
rates further, but it also slashed its projections for economic
growth and inflation given the global economic downturn,
financial markets in stress, and the fall in commodity prices.
 "It looks like rates will be going lower in Canada and
that's not good for the (Canadian) currency," said Charmaine
Buskas, senior economics strategist at TD Securities.
 "The Canadian dollar has also been hit by softening oil
prices so that kind of one-two punch didn't really provide much
in the way of support for the (currency) today."
 Lower oil prices often weigh on the Canadian dollar because
Canada is a key supplier of oil to the United States.
 The rate cut follows the Bank of Canada's unexpected
50-basis-point cut on Oct. 8 in a coordinated move with other
central banks to help calm ailing financial markets. The bank's
key rate is now 2.25 percent.
 The Canadian dollar got a short-lived boost to C$1.2023 to
the U.S. dollar, or 83.17 U.S. cents, immediately after the
rate announcement since it was less than the 50-point cut many
had been anticipating.
 But the gain was quickly wiped out as the market started to
sift through the details of the bank's statement. The Bank of
Canada will offer more details on its projection for the
economy and inflation when it releases its Monetary Policy
Report on Oct. 23.
 "What the market is really keying in on is the overt dovish
sentiment that's been delivered in the communique," said Jack
Spitz, managing director of foreign exchange at National Bank
of Canada.
 "Nothing about the communique that I can see suggests that
the bank is looking at anything other than potentially cutting
rates going forward."
 BOND PRICES RALLY
 Canadian bond prices all finished higher due to a sharp
selloff in equities and the likelihood of more rate cuts in
Canada.
 After big gains for Toronto Stock Exchange's main index on
Friday and Monday, investors returned to their selling ways on
Tuesday as the market fell 455 points, or 4.4 percent.
 Bond prices hovered around the break-even level early in
the morning but eventually moved higher across the curve after
the Bank of Canada cut its overnight lending rate to its lowest
level since September 2004.
 "Some of the optimism we had seen on Friday and Monday is
perhaps reversing and so money is flowing back into bonds,"
said Carlos Leitao, chief economist at Laurentian Bank of
Canada. "And while today's rate cut was generally what was
expected, people were expecting something a little more."
 The two-year bond rose 5 Canadian cents to C$101.19 to
yield 2.169 percent. The 10-year bond increased 21 Canadian
cents to C$104.48 to yield 3.691 percent.
 The yield spread between the two-year and the 10-year bond
moved to 154 basis points from 157 basis points at the previous
close.
 The 30-year bond rose 71 Canadian cents to C$113.56 to
yield 4.182 percent. In the United States, the 30-year Treasury
yielded 4.212 percent.
 (Editing by Peter Galloway)


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