Canada Bond Yields Tumble as Bank of Canada Takes Dovish Stance

(Bloomberg) -- Canada's government bonds rallied and the loonie tumbled after the nation's central bank pointed to signs of slower-than-expected growth as it left borrowing costs unchanged, leading traders to trim bets for a rate rise in January.

The yield on the country's two-year government bond fell as much as 7.4 basis points to a two month low of 2.044 percent, the biggest slide since May, while the Canadian dollar sank to the weakest since mid-2017. The market-implied probability that the Bank of Canada raises rates next month declined to about 37 percent from about 55 percent Tuesday, based on OIS.

“A January rate hike may not occur,” said Maria Berlettano, head of Canadian government credit strategy at CIBC. “The rate decision was as expected, but the statement was dovish. The statement acknowledged some new growth concerns and also suggested that there may be additional room for non-inflationary growth.”

The Canadian dollar weakened as much as 1 percent to C$1.34, and is now down 6 percent this year versus the greenback. The Bank of Canada kept its overnight rate at 1.75 percent on Wednesday but noted global trade frictions and oil-production cuts in Alberta as forces dampening its outlook.

Canadian stocks extended gain after the statement from the Bank of Canada, with the S&P/Toronto Stock Exchange Composite Index rising as high as 1.3 percent.

--With assistance from Michael Bellusci.

To contact the reporter on this story: Esteban Duarte in Toronto at eduarterubia@bloomberg.net

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Mark Tannenbaum, Jacqueline Thorpe

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