By Frank Pingue
TORONTO, Sept 5 (Reuters) - The Canadian dollar closed
lower against the U.S. currency on Wednesday as investors
stayed away from riskier assets after the Bank of Canada
scraped talk of further rate hikes because of the turmoil in
Domestic bond prices rallied as the market priced out the
potential for a rate hike any time soon, while weak U.S. data
also offered support.
The Canadian dollar closed at C$1.0535 to the U.S. dollar,
or 94.92 U.S. cents, down from C$1.0494 to the U.S. dollar, or
95.29 U.S. cents, at Tuesday's close.
The Bank of Canada did as expected and left its overnight
rate steady at 4.50 percent, but the much-anticipated statement
that accompanied its decision suggested it could stick to the
sidelines as credit market turmoil tempers economic growth.
That marked a change from the previous statement issued in
July when the central bank said there was a need for a "modest
further increase" in the overnight rate.
Also weighing on the currency was political uncertainty
following news on Tuesday that Prime Minister Stephen Harper
will wait until Oct. 16 to convene a new session of Parliament,
setting up a vote of confidence in the minority Conservative
government, which could trigger an election.
"We got political uncertainty now and on top of that the
Bank of Canada's clear statement that as the U.S. goes so goes
their thought process with regard to monetary policy going
forward," said David Watt, senior currency strategist at RBC
"Although we don't necessarily think the U.S. economy is
going to slow that dramatically, it is a risk that's out there,
and so you just have some downside risks that are are becoming
more prevalent for the Canadian dollar.
The majority of Canada's primary securities dealers now
expect the Bank of Canada to leave interest rates unchanged for
the rest of 2007, according to a Reuters poll taken after the
central bank's latest rate decision.
Helping to cushion the Canadian dollar's fall was a rise in
oil prices closer to $76 a barrel due largely to concerns that
hurricane activity could crimp U.S. inventories. Canada is a
major producer and exporter of oil and the currency often
follows the direction of oil prices.
The Canadian data calendar will pick up on Thursday with
the arrival of July building permits and the Ivey Purchasing
Managers Index for August. But the key report of the week will
be the August jobs data on Friday.
BONDS EXTEND GAINS
Domestic bond prices managed to reclaim another chunk of
last week's big selloff as the Bank of Canada did away with
talk of near-term interest rate hikes.
Also luring investors to the safety of bonds was another
slide in North American equity markets and U.S. data that
showed weaker than expected employment and housing data.
The data supported a growing view that the U.S. Federal
Reserve will cut its fed funds target rate later this month.
That helped boost the U.S. treasury market and allowed the
smaller domestic market to tag along.
The two-year bond rose 20 Canadian cents to C$99.23 to
yield 4.213 percent, while the 10-year bond climbed 48 Canadian
cents to C$97.29 to yield 4.344 percent.
The yield spread between the two-year and 10-year bond
moved to 13.1 basis points from 6.8 at the previous close.
The 30-year bond gained 70 Canadian cents to C$110.41 to
yield 4.370 percent. In the United States, the 30-year treasury
yielded 4.770 percent.
The three-month when-issued T-bill yielded 4.12 percent,
down from 4.10 percent at the previous cl