By Frank Pingue
TORONTO, Sept 18 (Reuters) - The Canadian currency shot to
within a "heartbeat" of parity with the U.S. dollar on Tuesday
due to an aggressive rate cut by the U.S. Federal Reserve and
lofty commodity prices.
Domestic bond prices were mixed as the short-end rallied
after the Fed's rate cut and the long-end dipped as the U.S.
central bank rekindled worries about inflation.
The Canadian dollar closed at C$1.0138 to the U.S. dollar,
or 98.64 U.S. cents, up from C$1.0280 to the U.S. dollar, or
97.28 U.S. cents, at Monday's close.
During the session the Canadian dollar had been enjoying
meaty gains as oil prices hit a record high near $82 a barrel
while gold remained near a 16-month high.
Anticipation of a Fed rate cut was also supporting the
currency for the first half of the session, which saw the
Canadian dollar hit a 30-year high against the greenback for
the fourth straight session.
But the Fed's decision to cut its overnight rate by 50
basis points instead of the 25 points that many in the market
had anticipated, helped the Canadian dollar push closer to
parity, a level not reached since November 1976.
It hit a session high of C$1.0128 to the U.S. dollar, or
98.74 U.S. cents, its highest level since January 1977.
"It had gotten a boost by the latest run up in oil prices
and also in anticipation of the rate cut," said Doug Porter,
deputy chief economist at BMO Capital Markets. "But the Fed's
bold move just sent the currency on yet another rocket ride and
parity is just a heartbeat away now."
The Fed rate cut narrowed the Canada-U.S. rate gap in favor
of the Canadian dollar. The Bank of Canada is widely expected
to leave its overnight rate at 4.50 percent through 2007.
The next boost for the Canadian currency could come on
Wednesday when August consumer price index data is released.
The data is the second key report from August, when credit
markets began to experience serious liquidity problems stemming
from the U.S. subprime mortgage market.
There is also a chance the Canadian dollar could attract
attention during the overnight session and reach parity.
"The currency just seems to be focusing in on parity like a
laser beam," said Porter. "It could move independently even if
the U.S. dollar itself isn't particularly weak overnight."
The all-time high for the Canadian dollar was reached in
August 1957, when it was worth $1.0614, according to the Bank
of Canada's Web site.
Canadian bond prices were mixed as the short-end rose after
the Fed rate cut while the long end fell as the central bank
said it still believed the U.S. economy faced some risk of
Other domestic data due this week that could influence
Canadian bond prices includes July wholesale trade on Thursday
and July retail trade on Friday.
The two-year bond rose 14 Canadian cents to C$99.28 to
yield 4.190 percent, while the 10-year bond fell 1 Canadian
cent to C$97.55 to yield 4.311 percent.
The yield spread between the two-year and 10-year bond was
at 12.1 basis points from 3.1 at the previous close.
The 30-year bond dropped 50 Canadian cents to C$110.63 to
yield 4.358 percent. In the United States, the 30-year treasury
yielded 4.758 percent.
The three-month when-issued T-bill yielded 4.10 percent, up
from 4.08 percent at the previous c