Canadian dollar firmer after Bank of Canada keeps hike bias

TORONTO (Reuters) - The Canadian dollar strengthened to a session high against the U.S. dollar on Tuesday after the Bank of Canada kept interest rates on hold and maintained its rate-increase stance, reiterating its position from October despite a softening economy.

The central bank held its overnight lending rate untouched at 1 percent, as expected, the longest period of inactivity since the early 1950s. Investors were focused on the bank's language for any indication its intent to tighten monetary policy has shifted.

Bank of Canada Governor Mark Carney, who will take the reins at the Bank of England next July, has been signaling a need to raise the main policy rate since April, making the country the only industrialized nation to lean toward a rate increase.

"The key is that they're keeping word for word to the bias that they introduced in October ... I think the real test for the bank and markets will be whether we do get a reversal in the economic data in the weeks ahead, or it continues to deteriorate," said Doug Porter, deputy chief economist at BMO Capital Markets.

"I think that's going to determine whether they stick to that bias in early 2013."

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the announcement traders scaled back their small bets on a rate cut in 2013.

At 9:56 a.m. (1432 GMT), the Canadian dollar was at C$0.9924 versus the U.S. dollar, or $1.0077, compared with C$0.9949, or $1.0051, at Monday's North American session close. It firmed to a session high of C$0.9920, or $1.0081 after the Bank of Canada's announcement.

Camilla Sutton, chief currency strategist at Scotiabank noted the Canadian dollar has held back while other currencies rallied, but could now strengthen over the next few weeks to C$0.9750, or $1.0256.

"The Canadian dollar wasn't (rallying) as it was waiting for the Bank of Canada risk to pass. Now that it's passed, this type of steady-as-she-goes statement opens up the potential for Canadian dollar strength," Sutton said.

Canada's dollar was mostly underperforming other major currencies, including the Australian dollar, where it hit its weakest level in three weeks.

The currency, which often tracks moves in global equity and commodity markets, failed to take direction from other market factors for the most part on Tuesday, focusing instead on the Bank of Canada.

Elsewhere, the euro hit a six-month high and European shares and peripheral euro zone bonds added to recent gains Tuesday, as optimism over Greece's plan to buy back debt and signs of progress elsewhere in the bloc boosted sentiment.

Meanwhile, the price of oil, a key Canadian export, slipped as weak manufacturing data and protracted U.S. budget negotiations fanned concerns about the health of the global economy.

Canadian bond prices were somewhat mixed. The two-year bond down one Canadian cent to yield 1.067 percent, and the benchmark 10-year bond down 4 Canadian cents to yield 1.703 percent.

(Additional reporting by Claire Sibonney; Editing by Theodore d'Afflisio)

Source: http://news.yahoo.com/canadian-dollar-steady-investors-await-bank-canada-131738144--finance.html

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