By John McCrank
TORONTO, Aug 31 (Reuters) - The Canadian dollar ended
higher against the greenback on Friday, after data showed
second-quarter economic growth in Canada beat analyst
Domestic bond prices finished lower as the data suggested
eventual tightening by the Bank of Canada, which is expected to
wait for the dust to settle from the global credit crunch
before making any further rate moves.
The Canadian dollar ended at C$1.0562 to the U.S. dollar,
or 94.68 U.S. cents, up from C$1.0586 to the U.S. dollar, or
94.46 U.S. cents, at Thursday's close.
The gross domestic product data showed the Canadian economy
sizzled in the second quarter, jumping 3.4 percent on an
The report propelled the currency to a session high of
around C$1.0507 to the U.S. dollar, or 95.17 U.S. cents, but it
gave back much of the gains due to lingering credit concerns.
"The market realized that this is history and that the
second-quarter numbers simply don't take into account the
crisis since then... so that's why to the extent that there was
a rally, it died very quickly," said Benjamin Tal, senior
economist at CIBC World Markets.
The strong GDP report is not expected to bring on a Bank of
Canada rate hike when sets policy on Sept. 5, but it could
support the idea of a rate hike later in the year.
A Reuters poll taken after the GDP numbers showed that all
13 of Canada's primary securities dealers predict the central
bank would leave interest rates steady next week. The majority
now expect rates to remain on hold for the rest of the year.
Eight of the dealers forecast rates to stay on hold at the
bank's decision date in October, while three called for a 25
basis point rate hike, and two expected a quarter-point cut.
Twelve dealers forecast no change to the overnight rate in
December, while one expects a 25 basis point rate hike.
In July, the bank raised its key overnight rate for the
first time in over a year to 4.50 percent.
Also of interest today were separate speeches by U.S.
President George Bush and U.S. Federal Reserve Chairman Ben
Bernanke addressing the limp U.S. housing sector.
Bush pledged to help struggling homeowners refinance their
mortgages, and Bernanke reassured investors that the Fed would
take necessary steps to shield the U.S. economy from the credit
crunch. Neither speech helped the Canadian dollar.
CIBC's Tal said the news should have been positive for the
currency, as a more stable U.S. economy would support global
growth and demand for commodities, and the Canadian economy is
"The only reason I think that the market did not move was
that they don't believe that this Bush business will lead to a
significant acceleration in economic stability and will bring
the housing market crisis to an end," said Tal.
"The Bernanke story was already discounted in the markets,
so the only thing Bernanke can do now is disappoint people."
BONDS UNDER PRESSURE
Canadian bond prices fell on the strong GDP numbers, the
Bush and Bernanke speeches, and a rally on North American
The strong domestic economy and the prospect of more stable
economic markets have investors edging away from the safety of
Bond prices had been rallying during the credit storm, as
the prospect of a slowdown in global growth had market players
betting on future interest rate cuts in Canada.
"The most notable thing I'm seeing (after the data) is that
the futures market is really starting to price out at least a
certain aspect of those rate cuts," said Eric Lascelles, a
strategist at TD Securities.
The two-year bond dropped 23 Canadian cents to C$98.99 to
yield 4.356 percent, while the 10-year bond fell 47 Canadian
cents to C$96.67 to yield 4.424 percent.
The yield spread between the two-year and 10-year bond
moved to 6.7 basis points from 6.7 at the previous close.
The 30-year bond slid 65 Canadian cents to C$109.28 to
yield 4.435 percent. In the United States, the 30-year treasury
yielded 4.827 percent.
The three-month when-issued T-bill yielded 4.10 percent, up
from 3.95 percent at the previous close.