NEWS / Trade Policy

Canadian dollar dips on Dodge fallout

Domestic bonds edged lower after clawing back most of their losses in the previous session after Dodge's comments also forced traders to reconsider their previous, aggressive bets on continued monetary tightening.

At 8:50 a.m. (1250 GMT), the currency was at C$1.1149 to the U.S. dollar, or 89.69 U.S. cents, down from C$1.1092 to the U.S. dollar, or 90.16 U.S. cents, at Wednesday's close.

Dodge said on Wednesday month-to-month indicators tend to be volatile, and noted that the bank makes its rate decisions with an eye to conditions 12 to 24 months down the road.

The comments followed Canadian retail sales data for April that blew past expectations and added to the growing stack of robust economic data that cemented expectations for a Bank of Canada rate hike on July 11.

"Although I don't think that the door is completely closed on a rate hike in July, certainly the markets were expecting something more hawkish out of Dodge," said Marc Levesque, chief fixed-income strategist at TD Securities.

"For all intents and purposes the market is pricing in another rate hike in July, but they are reassessing the probabilities that the Bank will indeed go, and frankly I don't think Dodge knows himself."

Levesque expects the Bank of Canada to closely monitor its Business Outlook Survey on June 30 and the next employment report on July 7 to see if inflation risks are higher than initially thought.

With little major data expected for the rest of the week, the market could start looking ahead to next week's expected quarter-point rate hike by the U.S. Federal Reserve and, more specifically, the accompanying statement.

The Canada-U.S. interest rate gap favors the greenback, with the fed funds rate at 5 percent compared with the Bank of Canada's 4.25 percent overnight rate.

BONDS

Canadian bonds prices were steady at lower levels after a reading of U.S. jobless claims came in broadly in line with economists' forecasts.