CANADA FX DEBT-C$ dives, bond yields sink to record

Fri Jun 1, 2012 4:31pm EDT
 
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* C$ ends at C$1.0394 vs US$, or 96.21 U.S. cents
    * Hits 6-month low of C$1.0443 vs US$, or 95.76 U.S. cents
    * Bond yields tumble to record lows
    * Traders raise bets on Bank of Canada rate cut by end-2012

    By Jennifer Kwan	
    TORONTO, June 1 (Reuters) - Canada's dollar hit its weakest
level in six months on Friday and longer-term bond yields
tumbled to record lows as investors fled riskier trades after
weak North American economic data added to worries about
stumbling global growth.	
    Canada's dollar touched a low of C$1.0443 against
the greenback, or 95.76 U.S. cents, its lowest level since late
November after a disappointing U.S. jobs report. 	
    The data, which showed jobs growth in May at its weakest in
a year, raised worries that the U.S. economy is not immune to
weakness in Europe, where Spain is struggling to support its
banks, or to slower growth in China. 	
    The commodity-linked currency was also hurt by data that
showed the Canadian economy grew less in the first quarter than
the Bank of Canada had expected. 	
    Following Friday's data, traders raised bets of a Bank of
Canada interest rate cut by the end of the year. 	
    "The Bank of Canada (rate hike) has been completely priced
out for this year. In fact, cuts are priced in now," said Blake
Jespersen, managing director, foreign exchange sales at BMO
Capital Markets.	
    "The Canadian dollar and likely the Canadian economy are
going to be sideswiped by the massive problems going on in
Europe right now," he added.	
    The Canadian dollar, which underperformed most of its G10
currency peers, ended at C$1.0394 versus the greenback, or 96.21
U.S. cents, down from Thursday's North American session close at
$1.0329 against its U.S. counterpart, or 96.81 U.S. cents. The
currency was down around 1 percent for the week.	
    Speculation of a hike in interest rates had heated up after
the central bank used unexpectedly hawkish language in its April
17 policy statement, but the flare-up of the European debt
crisis and some tepid U.S. data have since cast doubt on any
plans to tighten monetary policy.	
    "The bottom line here is that there's no way the Bank of
Canada is moving this year, in my opinion," said Derek Holt,
vice president of economics at Scotiabank. "Not just on
geopolitical risks but also on growth disappointments on the
domestic side of the picture, which adds a new twist to the
policy risks in Canada."	
    All eyes will be on Tuesday's rate announcement and
accompanying policy statement.	
    "Certainly if you look at Canada as an isolated story, it
does warrant increasing rates. But given the global backdrop
here, (it's) going to be forced to stay on hold for quite some
time in my view," said BMO's Jespersen.	
    The Bank of Canada may signal on Tuesday that it is more
reluctant to raise interest rates than it was seven weeks ago,
without completely reversing its message that Canadians should
start preparing for higher borrowing costs down the road.
 	
    The North American data provided a fresh blow to investors
already worried about the global growth outlook.	
    European stock indexes fell sharply on Friday, U.S. stocks
tumbled more than 2 percent, while oil prices slid below $85 a
barrel. 	
    Canadian government bond prices climbed across the curve,
sending longer-dated yields to record lows for another day.
Canada's benchmark 10-year bond yield hit a record
trough of 1.615 percent, while the 30-year yield 
touched a record low of 2.195 percent.	
    The yield on the two-year bond, especially
sensitive to Bank of Canada thinking, marked its lowest level
since January at 0.863 percent.