20000205

Canada dollar down slightly after rate tightening

TORONTO: The Canadian dollar ended down slightly on Thursday after weakening in early trading and largely shrugging off the Bank of Canada's decision to raise its bellwether bank rate 25 basis points to 5.25 percent.

The currency at first showed virtually no reaction to the widely expected policy move, which was announced at the Canadian central bank's window for policy changes.

It hovered around C$1.4410 until about 9:30 a.m. (1430 GMT), then began to strengthen, climbing to the C$1.4360 area before surrendering most of its gains later in the session.

The Canadian dollar closed at C$1.4420 (69.35 US cents) on Thursday morning after closing at C$1.4398 (69.45 US cents) in the previous session.

Diego Giurleo, managing director of global markets with the Royal Bank of Canada in New York, said the Canadian currency was consolidating after strength in earlier sessions.

"The general sentiment is that Canada has had a nice run. I think you're going to see some consolidation here," Giurleo said.

Although the Bank of Canada's policy move was largely factored in by markets and did not have much direct impact on the currency, it may have provided some longer-term support, analysts said.

"I think the fact that they did hike is helping Canada. Otherwise, I think the market would have interpreted that as a general desire for weakening," Giurleo said.

There were normal, two-way flows in the Canadian dollar on Thursday, but the currency was overshadowed by activity in the majors, he said. "Today we saw a lot of movement in euro and yen, and Canada has taken a back seat to it," Giurleo said.

Benjamin Tal, senior economist with the Canadian Imperial Bank of Commerce, said the overall market view of the currency seems to be positive.

"I think that the overall sentiment in the market is basically positive in terms of the dollar, and I think that the main reason is some optimism about the overall economic performance in Canada," said Tal.

He said market focus has shifted towards economic fundamentals, and away from the narrow focus on interest rate differentials and commodity prices that has been driving the Canadian dollar.

"If you look at that past two or three months and the way the dollar has been behaving, you will find that gradually, and increasingly, it's starting to react more to economic news," Tal said. "We're starting to go back to the fundamentals."

Interest-rate differentials with the US will continue to restrain the Canadian currency's ability to rally too dramatically, he added.

Both Canadian and US employment data are scheduled for release on Friday morning. Tal said he is expecting job gains of between 30,000 and 40,000 in the Canadian report.

In cross-trading against major currencies, the Canadian dollar was at 74.59 yen and at C$1.4266 against he euro. The Canadian dollar was at A$1.0878 against the Australian dollar.-Reuters