December 15, 2011 / 10:27 PM / 6 years ago

C$ firms on "constructive" risk sentiment

TORONTO (Reuters) - The Canadian dollar firmed on Thursday, recovering from a two-week low in the previous session, as encouraging U.S. economic data and a solid Spanish debt auction eased fears that the euro zone debt crisis could spark a global recession.

U.S. first-time claims for jobless benefits fell to a 3-1/2-year low in the latest week, raising expectations that the weak labor market, which has bogged down U.S. economic growth, might be gaining traction. Signs of strength in the manufacturing sector also boosted investors' risk appetite.

There was also a sign of improvement in the European economy. A private gauge of euro zone manufacturing unexpectedly rose in December, although it remained at a level indicating a fourth straight month of contraction.

"Generally, risk sentiment seems to be a little bit more constructive today, though it remains to be seen if that lasts," said Shaun Osborne, chief currency strategist at TD Securities.

"The next couple of quarters are going to be a pretty tough slog for global growth and volatility is going to remain quite high, so that suggests that risk assets in all likelihood are going to underperform so the longer term outlook is still more geared towards Canadian dollar weakness."

The Canadian dollar ended the North American session at C$1.0357 versus the U.S. dollar, or 96.55 U.S. cents, up from Wednesday's North American finish at C$1.0396 to the U.S. dollar, or 96.19 U.S. cents.

Recent predictions for the currency heading into 2012 have been quite mixed. TD Securities on Wednesday updated its targets for next year, eyeing the currency at C$1.11 against the U.S. dollar, or 90.09 U.S. cents, by the second quarter, before ending next year around C$1.05, or 95.24 U.S. cents.

Scotia Capital's forecast on Thursday was more optimistic. Canada's triple-A status and developed bond market, and a soft landing in China - which suggests that commodity prices will be well supported - are expected to help the currency firm to C$0.98 versus the U.S. dollar, or $1.02, by the end of next year.

BMO Capital Markets also weighed in with a Canadian dollar forecast on Thursday. In a note to clients, senior economists Michael Gregory and Benjamin Reitzes said that with continued risk aversion and the chance of an interest rate cut by the Bank of Canada, the currency could slip to C$1.06, or 94.30 U.S. cents by the second quarter of next year.

LONG BONDS RALLY

Canadian government bonds rallied at the long end of the curve, as investor sentiment remained fragile.

The two-year bond slipped 2 Canadian cents to yield 0.874 percent, while the 10-year bond edged 27 Canadian cents higher to yield 1.924 percent. The 30-year bond climbed 35 Canadian cents to yield 2.523 percent, after touching another record low yield at 2.501 percent.

Warren Jestin, chief economist at Scotiabank Group, predicted that longer-dated bond yields will recover in 2012, tracking U.S. Treasury yields higher.

"Markets are becoming a little more exuberant and as the flight to the U.S. begins to diminish, we see a very sudden shift particularly in the U.S. 10-year bond," he said.

"Canada cannot escape that type of movement, we can be insulated a bit on a day to day basis or on the overall movement, but I think the risk is very, very materially on the upside ... a percentage point or so."

Reporting By Claire Sibonney; editing by Rob Wilson

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