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Canadian Dollar Higher, Bonds Sink After Dodge
Monday, November 22, 2004
TORONTO (Reuters) - The Canadian dollar romped to a 12-year high on Monday, buoyed by better than expected retail sales figures and Bank of Canada Governor David Dodge's remarks that the domestic currency's recent rise versus the greenback was not inappropriate.
Bonds were hit by Dodge's comments, which indicated that the economy was operating close to capacity and that the central bank would need to reduce monetary stimulus over time.
At 9:25 a.m., the Canadian dollar was at C$1.1877 to the U.S. dollar, or 84.20 U.S. cents, up from C$1.1930 to the U.S. dollar, or 83.82 U.S. cents, at Friday's close.
Canadian retail sales rose a higher than expected 0.2 percent in September, hitting a record C$29.1 billion, Statistics Canada said on Monday. Analysts had expected, on average, no change from August.
The numbers helped send the currency to a 12-year high at C$1.1859. The currency, which was relatively flat last week after a near-uninterrupted surge since mid-September, found new legs after Dodge spoke in Berlin.
"It has not been inappropriate in more recent times to see that re-appreciation," Dodge said at a meeting of the German-Canadian business club in reference to the Canadian dollar's rise. "Domestic demand is stronger and the prices of the goods and services we export are up, and up very strongly. The appreciation is absolutely what economists would predict."
Over the weekend, Dodge also told Reuters the central bank is watching closely whether a strong Canadian dollar is hurting exports and creating pressures on the economy.
Analysts said the remarks were reasonably confident about economic growth in Canada, but will also look for further comments this week when Dodge and Bank of Canada Senior Deputy Governor Paul Jenkins appear before the Canadian Senate committee on Nov. 24.
"I think he'll try to address some of the concerns about the currency's strength," said Mark Chandler, senior analyst at Scotia Capital.
"I think his response will be largely what we received from Jenkins earlier where he said, essentially, that monetary policy really can't deal with concerns of the strength of the currency in specific sectors, but that it's best dealt with through fiscal policy and they think that the overall stance is still correct."
A few government officials last week said they were worried the surging currency was undermining the Canadian economy.
Besides Dodge's comments, the Canadian dollar was also benefiting from a defensive U.S. dollar. The weekend meeting of world finance chiefs ended with no agreement to stem the U.S. dollar's decline.
BONDS DECLINE ON DODGE REMARKS
Dodge's comments put pressure on Canadian bond markets on Monday. Last week, bonds had risen on a mounting view that further sharp appreciation of the currency or more signs that the stronger currency is eating into exports could prompt a slower pace of rate hikes.
"Bond markets globally are a little bit firmer as a result of the rise in oil. But we are not really participating much because of Dodge's comments," said Chandler.
The two-year bond fell 12 Canadian cents to C$99.91 to yield 3.296 percent, while the 10-year bond lost 20 Canadian cents to C$103.50 to yield 4.542 percent.
The yield spread between the two-year and 10-year bond moved to 124.6 basis points from 128.2 at the previous close.
The 30-year bond, due 2029, retreated 25 Canadian cents to C$110.40 to yield 5.008 percent. In the United States, the 30-year treasury yielded 4.87 percent.
The three-month when-issued T-bill yielded 2.70 percent, up from 2.68 percent at the previous close.
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