By Frank Pingue
TORONTO, Aug 20 (Reuters) - The Canadian dollar closed at
its highest level in a week against the U.S. currency on Monday
as investors remained comforted by last week's U.S. Federal
Reserve decision to cut its discount lending rate.
Domestic bond prices rose ahead of key Canadian economic
data due on Tuesday, which could erode chances of a Bank of
Canada rate hike next month if it misses expectations.
The Canadian dollar closed at C$1.0541 to the U.S. dollar,
or 94.87 U.S. cents, up from C$1.0614 to the U.S. dollar, or
94.21 U.S. cents, at Friday's close.
A rebound in North American stock markets after last week's
tumble proved a relief to investors, given the recent credit
fears that have wreaked havoc on financial markets.
Those concerns were eased somewhat last week when the Fed
decided to cut the discount rate at which it lends to banks, a
move that gave a boost to the Canadian dollar.
That sentiment spilled over into Monday's North American
session and helped carry the domestic currency to a session
high of C$1.0535, or 94.92 U.S. cents.
"It is to an extent the rate cut by the Federal Reserve
which did sort of give people some indication that central
banks are going to backstop the liquidity situation," said
David Watt, senior currency strategist at RBC Capital Markets.
"So we are not necessarily going to get the breakdown in
the financial markets that some people had been fearing would
occur late last week."
According to Watt, the domestic data due on Tuesday, most
notably the July consumer price index figures, will help
determine the Canadian dollar's next move as that will be
watched by the Bank of Canada ahead of its Sept. 5 rate
"We still seem to have a liquidity squeeze going on in
Canada so that already raises questions in the market as
already leaning toward the possibility of the Bank of Canada
cutting rates," said Watt.
"If the data tomorrow is below expectations I think people
are just going to completely abandon any expectations that the
Bank of Canada is going to be raising rates in September or
maybe even through the rest of the year."
BONDS UP AHEAD OF DATA
Canadian bond prices all pushed higher on anticipation that
Tuesday's CPI and June retail trade data could fall short of
estimates and keep the Bank of Canada from hiking its overnight
rate in September.
Consumer prices for July are expected to rise 0.1 percent
after an unexpected 0.2 percent drop in June, while retail
sales are expected to have dipped 0.5 percent in June after
humbling estimates with a 2.8 percent gain in the prior month.
The central bank had been widely expected to lift its key
rate to 4.75 percent next month, but market turmoil in recent
weeks has made that action seem less certain.
The two-year bond rose 13 Canadian cents to C$99.38 to
yield 4.112 percent, while the 10-year bond increased 23
Canadian cents to C$96.98 to yield 4.382 percent.
The yield spread between the two-year and 10-year bond
moved to 27.0 basis points from 22.3 at the previous close.
The 30-year bond rose 8 Canadian cents to C$109.17 to yield
4.441 percent. In the United States, the 30-year treasury
yielded 4.977 percent.
The three-month when-issued T-bill yielded 4.17 percent,
down from 4.23 percent at the previous close.