July 15, 2020 / 7:14 PM / 20 days ago

CANADA FX DEBT-Canadian dollar rallies as BoC forgoes adding to quantitative easing

 (Adds strategist quotes and details throughout; updates prices)
    * Canadian dollar gains 0.8% against the greenback
    * Bank of Canada holds benchmark interest rate at 0.25%
    * Canadian manufacturing sales rise 10.7% in May
    * Canada-U.S. 10-year spread widens by 2 basis points

    By Fergal Smith
    TORONTO, July 15 (Reuters) - The Canadian dollar
strengthened to a six-day high against the greenback on
Wednesday as investors grew more optimistic about a COVID-19
vaccine and the Bank of Canada decided against increasing the
pace of its bond purchases.
    Canada's economic activity will not return to pre-pandemic
levels until 2022, the central bank said, promising to keep
interest rates at 0.25%, a level it considers the floor, until
economic slack is absorbed.             
    The "forward guidance" on rates was too vague to undermine
the loonie, said Simon Harvey, FX market analyst for Monex
Europe and Monex Canada.
     At a time when markets are pricing in negative rates from
some other major central banks, the Bank of Canada could be
regarded as "relatively hawkish" by opting to keeping the
current level of bond purchases unchanged, Harvey said.
    The central bank is buying at least C$5 billion a week of
Government of Canada bonds.
    Wall Street approached its highest level in more than four
months after a small-scale study by Moderna Inc          showed
its experimental COVID-19 vaccine produced high levels of
virus-killing antibodies.             
    Canada runs a current account deficit and is a major
exporter of commodities, including oil, so the loonie tends to
be sensitive to the global flow of trade and capital.
    U.S. crude        prices settled 2.3% higher at $41.20 a
barrel, while the Canadian dollar        was trading 0.8% higher
at 1.3507 to the greenback, or 74.04 U.S. cents. The currency
touched its strongest intraday level since last Thursday at
1.3505.                 
    The gain for the loonie came as domestic data showed that
factory sales jumped by a record 10.7% in May from April.
                
    Canada's 10-year yield             was nearly unchanged at
0.534%, while it traded 2 basis points further below the U.S.
10-year yield for a spread of 9.8 basis points.

 (Reporting by Fergal Smith; Editing by Nick Zieminski and Peter
Cooney)
  
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