News from Reuters
Canada Dollar Flat, Bonds Sag As Rate Hike Seen
Friday, September 03, 2004
By Cameron French
TORONTO (Reuters) - The Canadian dollar finished flat against the greenback on Friday, but rose against other major currencies, as a strong U.S. jobs report boosted expectations for a Bank of Canada rate hike next week.
Bond prices plunged as growing certainty of a rate increase on Wednesday made their fixed yields less attractive to investors.
The domestic currency finished at C$1.2999 to the U.S. dollar, or 76.93 U.S. cents, little changed from C$1.2997, or 76.94 U.S. cents, at Thursday's close.
The Canadian dollar weakened early in the session but then steadily clawed back up after the U.S. Labor Department said nonfarm payrolls rose 144,000 in August, almost matching analysts' forecasts of 150,000.
July's gain was revised up to 73,000 from 32,000. The unemployment rate dipped to 5.4 percent from 5.5 percent.
"I think in the back of the market's mind there was still a little bit of uncertainty as to whether the Bank of Canada would be looking to tighten rates next week," said George Davis, chief technical analyst at RBC Capital Markets.
"I think, if anything, the nonfarm number just made the market a little bit more certain of the fact that the bank probably will tighten rates next Wednesday."
The news pushed both the Canadian and U.S. dollars up against other major currencies and helped the Canadian dollar stay close to the seven-month highs it hit two weeks ago.
The currency has been underpinned over the last couple of years by the interest rate premium Canada enjoys over the United States.
Canada's overnight rate is currently 50 basis points above the equivalent Fed funds rate, having narrowed slightly since the U.S. central bank began its tightening campaign in June.
A Reuters poll on Thursday found all but one of Canada's 12 primary bond dealers expect the Bank of Canada to raise the key rate by 25 basis points next Wednesday.
"I think what you're starting to see now is countries that have been on a tightening phase, as in the U.K., Australia, and New Zealand, are starting to move toward the end of that phase," said Davis.
With Canada just at the beginning of such a phase, this should benefit the Canadian dollar, he added.
BONDS FALL HARD ON JOBS DATA
Bond prices sank as the firm U.S. jobs data cemented expectations of next week's rate hike.
"The headline number didn't come in as low as feared and the unemployment rate unexpectedly fell, so the Fed is firmly on track to continue raising interest rates later this month," said Sal Guatieri, senior economist at Bank of Montreal.
Thin markets ahead of the Labor Day holiday weekend compounded the losses, analysts said, as did fears that the jobs numbers would come in lower than forecast following weak totals in the previous two months.
"The market was kind of braced for that, but combined with the upward revisions to the two previous months, it suggests that employment is picking up quite nicely," said Guatieri.
With signs pointing to a strengthening economy, analysts said prices should continue to fall as yields follow interest rates higher.
The two-year bond fell 16 Canadian cents to C$99.78 to yield 3.126 percent, while the 10-year bond retreated 57 Canadian cents to C$102.19 to yield 4.715 percent.
The yield spread between the two-year and 10-year bond moved to 158.9 basis points from 161.0 at the previous close.
The 30-year bond, due 2029, fell 72 Canadian cents to C$107.72 to yield 5.191 percent. In the United States, the 30-year treasury yielded 5.052 percent.
The three-month when-issued T-bill yielded 2.33 percent, up from 2.27 percent at the previous close.
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