CANADA FX DEBT-C$ at 1-1/2-month low as investors mull policy shift

October 25, 2013

* C$ at C$1.0445 vs US$, or 95.74 U.S. cents

* Loonie down for third session following central bank shift

* Canadian bond prices mixed across the curve

By Leah Schnurr

TORONTO, Oct 25 (Reuters) - The Canadian dollar languished

at a 1-1/2-month low on Friday after this week's policy shift by

the country's central bank led investors to believe interest

rates will stay where they are for longer than had been

anticipated.

Highlighting weaker-than-expected growth and inflation, the

Bank of Canada on Wednesday dropped any mention of eventual rate

increases from its latest policy statement, after more than a

year of warning that rates will one day have to rise.

The central bank has kept rates at 1 percent since 2010, and

analysts said the removal of the Bank of Canada's rate-rise bias

represented a more neutral tone for policy.

Analysts had until recently largely expected the Bank would

resume raising rates at the end of next year. A Reuters poll

showed Canada's primary dealers now expect the Bank of Canada to

maintain rates at 1 percent well into 2015.

The loonie will likely trade as weak as C$1.07 by the end of

the year, said Mark Chandler, head of Canadian fixed income and

currency strategy at Royal Bank of Canada, though delayed

expectations of when the Federal Reserve will start to reduce

its economic stimulus could soften the decline.

"We had thought that (level) could happen by the end of this

year. It's possible it might spill into the new year with the

shifting in the taper timetable in the U.S.," said Chandler.

The Canadian dollar was at C$1.0445 versus the

greenback, or 95.74 U.S. cents, weaker than Thursday's close of

C$1.0425, or 95.92 U.S. cents. The Canadian currency hit a

session low of C$1.0456, the lowest level since early September.

Investors will get more insight into what the Fed might do

when the central bank meets next week. The Fed surprised markets

in September with its decision to hold the pace of its $85

billion a month in bond purchases steady, rather than trimming

the amount as had been expected.

The loonie touched a three-month high following the

September Fed announcement but has weakened since. Analysts see

the Canadian dollar benefiting from any delay in the Fed's

withdrawal from quantitative easing as the currency should

attract some risk appetite.

Canadian government bond prices were mixed across the

maturity curve. The two-year bond was up 4-1/2

Canadian cents to yield 1.076 percent, while the benchmark

10-year bond was off 2 Canadian cents to yield 2.429

percent.