CANADA FX DEBT-C$ falters on Greece politics, CMHC

Tue May 8, 2012 2:41pm EDT
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* C$ at C$0.9983 vs US$, or $1.0017
    * Risk assets slide on Greek uncertainty
    * CMHC predicts interest rates on hold this year
    * Bond prices push higher across curve

    By Jennifer Kwan	
    TORONTO, May 8 (Reuters) - Canada's dollar fell against its
U.S. counterpart on Tuesday as Greece struggled to form a new
government and investors worried about Europe's ability to fend
off a deeper crisis in the region. 	
    Canada Mortgage and Housing Corp's (CMHC) prediction that
central bank interest rates will stay on hold this year
 also proved to be a key factor weighing on the
    Canada's dollar had risen sharply following a more hawkish
stance by the Bank of Canada last month. The central bank
surprised investors with a more positive domestic economic
outlook and an explicit warning that it may have to start
raising interest rates again, pushing up the Canadian currency.	
    But in recent sessions and following the CMHC comments the
market has pulled back on expectations of a rate increase, said
Ian Pollick, fixed income strategist at RBC Capital Markets.	
    The CMHC's statement that it expects the Bank of Canada to
hold rates steady for the year dimmed market expectations of a
rate increase, Pollick said, placing even greater emphasis on
the global situation.	
    "European conditions are continuing to unfold on the sour
side. People are coming to the realization that maybe we got
ahead of ourselves," he said.	
    The Bank of Canada has frozen rates at 1 percent since
September 2010 after it became the first in the G7 to raise
borrowing costs from lows hit during the financial crisis.
    The Canadian dollar dropped to a low of C$1.0023
against the greenback, or 99.77 U.S. cents, its lowest since
April 16. By 2:00 p.m. (1800 GMT), it was at C$0.9983 versus the
U.S. dollar, or $1.0017, down from Monday's finish at C$0.9930
versus the U.S. dollar, or $1.0070.	
    Global equity, currency and commodity markets were rattled
after a call to form a new government for Greece included a
renunciations of the terms of a bailout that is keeping the
country's finances afloat.  	
    "The Canadian dollar is lower because of increased risk
aversion and that entirely relates to European political
developments as the Greek election result continues to filter
through the market," said Fergal Smith, managing market
strategist at Action Economics.	
    "The idea that ... the anti-bailout party is going to try to
form a government, the possibility that they'll default on bond
payments and ultimately the risk that they'll be forced to exit
the (European monetary union)."	
    Smith noted resistance for the U.S. dollar against Canada's
was still in place around parity to C$1.0050.	
    Surprising strong data on Canadian housing starts, led by a
surge in condominium construction that added to concern about a
possible housing bubble, cushioned the currency's fall.
    Canadian bond prices outperformed U.S. Treasuries across the
curve, with Canada's 2-year bond up 9 Canadian cents
to yield 1.228 percent, while the benchmark 10-year bond
 gained 47 Canadian cents to yield 1.970 percent.