CANADA FX DEBT-Europe concerns push C$ to 4-1/2-month low

Wed May 30, 2012 4:32pm EDT
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* C$ briefly touches lowest since Jan. 9
    * Currency ends at C$1.0292 vs US$, or 97.16 U.S. cents
    * Bond prices climb; 10-year, 30-year yields hit record lows

    By Jennifer Kwan	
    TORONTO, May 30 (Reuters) - Canada's dollar skidded to a
four-and-a-half month low against its U.S. counterpart on
Wednesday, and bond yields plummeted, as worries about the
euro-zone debt crisis rattled investor confidence.	
    Canada's currency tracked moves in global markets as the
euro fell to a near two-year low, while equities and commodity
markets plummeted on worries about Spain's ailing banking sector
and soaring borrowing costs.	
    Spain's stock market hit a nine-year low as the country's
borrowing costs rose to near the 7-percent level that had forced
other euro zone nations to seek bail outs. 	
    In Greece, polls showed parties for and against a bailout
were neck-and-neck, and the outcome of an election next month
that may decide whether it remains in the euro was still
    "Clearly attention is focused on Greece and Spain and the
uncertainty regarding the potential Greek euro exit is
overshadowing everything at this point," said John Clinkard,
chief economist at Deutsche Bank Canada.	
    The Canadian dollar hit a low of C$1.0312 versus
the U.S. dollar, or 96.97 U.S. cents, its weakest since Jan. 9.
But it trimmed losses to end the session at C$1.0292 vs US$, or
97.16 U.S. cents, still down from Tuesday's North American
session close at C$1.0229 versus the U.S. dollar, or 97.76 U.S.
    Market observers also said investors fled risk after China
signaled it does not need massive fiscal stimulus to stabilize
growth and calm investors fretting that the global economy may
slip back into a similar crisis as in 2008-2009. 	
    "I think China downplaying again the potential for stimulus
measures has also contributed to this sort of risk-off undertone
for the markets, but it's really about watching the headlines
and watching what's going on in Europe," said Shaun Osborne,
chief currency strategist at TD Securities.	
    Canada's currency outperformed most of its G10 currency
peers, including the commodity-linked Australian and New Zealand
dollar, but it underperformed the Japanese yen.	
    Against the U.S. dollar, Osborne cautioned that the Canadian
dollar could slip to the C$1.05 or C$1.06 area in the next month
or two given it has weakened five big figures, from C$0.98 to
C$1.03, in the last four weeks.	
    Later in the week, the closely watched U.S. jobs report and
Canadian growth numbers will provide further direction for
currency traders.	
    Following that, the broader market is expected to closely
scrutinize the Bank of Canada policy statement on June 5.	
    Rate hike speculation heated up last month after the Bank of
Canada used unexpectedly hawkish language in its April 17 policy
announcement, explicitly warning it may need to start raising
interest rates. Traders quickly priced in the prospect of a rate
hike later this year. 	
    "There are a lot of people that are starting to think that
the Bank of Canada will remove its policy guidance that it added
in April saying that they may increase rates," said Charles
St-Arnaud, Canadian economist and currency strategist at Nomura
Securities in New York.	
    "If they remove it, obviously, that will remove some support
for the Canadian dollar."	
    The Bank of Canada will keep interest rates on hold until
early 2013, as unrelenting concerns about the stability of the
euro zone offset signs of a rosier outlook for the domestic
economy, according to a Reuters survey released on Wednesday.
    Canadian government bond prices picked up across the curve
with Canada's two-year bond up 11 Canadian cents to
yield 1.113 percent. The benchmark 10-year bond 
yield touched a record 1.769 percent. The 30-year yield
 hit a record low of 2.319 percent.	
    The benchmark U.S. Treasury yield fell to its lowest in at
least 60 years on Wednesday as investors fled to safe-haven
assets to ride out Europe's deepening financial crisis.