November 28, 2008 / 2:02 PM / 9 years ago

Loonie falls on Canadian political uncertainty

TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Friday as the possibility of a second federal election in three months raised uncertainty among investors about the government’s focus on dealing with the financial crisis.

Canadian bond prices were flat to higher as fears of weak U.S. holiday sales had investors on the defensive, spurring a flight to safe-haven government debt.

At 8:12 a.m., the Canadian dollar was at C$1.2392 to the U.S. dollar, or 80.70 U.S. cents, down from C$1.2311 to the U.S. dollar, or 81.23 U.S. cents, at Thursday’s close.

The Canadian government released its fiscal update after market close on Thursday. It said Canada’s economy was sliding into recession into the fourth quarter, but that the federal budget should be balanced in the current fiscal year and beyond.

Canada’s three opposition parties said they would reject the update, saying it failed to produce a plan to combat the financial crisis or aid the auto sector.

If all three opposition parties vote against the package on Monday, the country faces the prospect of a second election in just three months or the creation of the country’s first ever coalition administration.

Also under fire was a plan to end a key subsidy to political parties, which was seen hurting the opposition much more than the ruling Conservatives.

“When you’ve got a government which is basically, when they talk about the opposition parties, that there’s been a declaration of war in parliament, it’s not necessarily a good thing for the currency right now,” said David Watt, a senior currency strategist at RBC Capital markets.

“A lot of investors are rewarding governments that are showing strong leadership on the financial crisis and it looks like we’re (Canada) going to be thrown into disarray.”

BONDS RISE

Canadian bonds rose were mostly higher over fears of anemic U.S. holiday sales, which added to the financial worries and sent investors to safe-haven government debt.

“You’re hearing a lot of talk about how dismal U.S. holiday sales are shaping up to be and there’s a lot of focus on what will happen today, black Friday, in the U.S.,” said Sal Guatieri, senior economist at BMO Capital Markets.

”Another report suggests that even with the most aggressive

discounting in decades, people could very well just stay home and keep their wallets shut.”

The Canadian overnight Libor rate was 2.5000 percent, up from 2.4417 percent on Thursday.

The two-year bond was flat at C$102.02 to yield 1.717 percent. The 10-year bond gained 20 Canadian cents to C$107.45 to yield 3.328 percent.

The yield spread between the two-year and 10-year bond was 176 basis points, down from 177 at the previous close.

The 30-year bond climbed 40 Canadian cents to C$118.60 to yield 3.911 percent. In the United States, the 30-year Treasury yielded 3.496 percent.

Reporting by John McCrank

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