CANADA FX DEBT-C$ hits 5-month low as Bank of Canada signals 'neutral' stance

Fergal Smith

(Updates prices)

* Canadian dollar touches weakest since Jan. 3 at 1.3547

* Bank of Canada leaves policy rate on hold at 1.75%

* Price of U.S. oil falls 0.6%

* Canada's 10-year yield hits a two-month low at 1.524%

TORONTO, May 29 (Reuters) - The Canadian dollar weakened to a near five-month low against the greenback on Wednesday before paring its decline, as the Bank of Canada was less hawkish than some investors had expected and as global trade tensions weighed on financial markets. The central bank left its overnight rate at 1.75% but said there was increasing evidence that the economic slowdown was temporary and that growth accelerated in the second quarter.

"It seemed like the market was expecting a more hawkish Bank of Canada and what it got was a neutral Bank of Canada," said Bipan Rai, North America head of FX strategy at CIBC Capital Markets. "The initial knee-jerk reaction was for the loonie to move lower." Money markets appeared skeptical that Canada's trade-dependent economy will pick up, indicating that chances of an interest rate cut this year are about 50%, unchanged from before the rate decision.

Global stocks and the price of oil, one of Canada's

major exports, fell as China signaled it was ready to use rare earths to strike back in its trade war with the United States, stoking concerns that the stand-off could hurt the global economy.

U.S. crude oil futures settled down 0.6% at $58.81 a


At 3:12 p.m. (1912 GMT), the Canadian dollar was

trading 0.2% lower at 1.3519 to the greenback, or 73.97 U.S. cents. The currency touched its weakest intraday level since Jan. 3 at 1.3547.

Toronto's stock market will nudge higher over the

rest of the year, but investors will need to wait until the second half of 2020 for the index to better April's record peak as global trade tensions weigh on company earnings, a Reuters poll found. Canadian government bond prices were higher across a flatter

yield curve, with the two-year up 3 Canadian cents toyield 1.521% and the 10-year rising 16 Canadian

cents to yield 1.558%. The 10-year yield hit its lowest intraday since March 28 at 1.524%. Canada's first-quarter gross domestic product data is due on Friday.

(Reporting by Fergal Smith Editing by Susan Thomas and Phil Berlowitz)