CANADA FX DEBT-C$ sags on post-U.S. election fiscal anxiety

Wed Nov 7, 2012 4:33pm EST
 
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* C$ at C$0.9961 vs US$ or $1.0039
    * Currency reached C$0.9875 shortly after Obama victory
    * Status quo results spark jitters over U.S. fiscal cliff
    * German manufacturing data, ECB comments weigh on sentiment

    By Solarina Ho
    TORONTO, Nov 7 (Reuters) - The Canadian dollar weakened
toward parity with the greenback on Wednesday as gains made
overnight following U.S. President Barack Obama's re-election
gave way to concerns about brewing fiscal problems in the United
States and Europe.
    Obama defeated Republican challenger Mitt Romney on Tuesday,
while Obama's fellow Democrats retained control of the Senate
and Republicans kept their majority in the House of
Representatives. 
    The results signaled no dramatic shift in U.S. economic
policies. But investors, worried about the looming U.S. "fiscal
cliff," sought safety in assets considered less risky than the
Canadian dollar.
    The fiscal cliff refers to a $600 billion package of tax
increases and spending cuts is scheduled to take effect
automatically beginning at the end of 2012, which many fear
would drive the U.S. economy back into recession, unless the
White House and Congress reach a deal to avert the budget
actions. 
    The prospect of a possible recession drove stock markets
down sharply on Wednesday.
    "The steep slide in equity prices tells the story for risk
assets in general and that includes the Canadian dollar. So the
weakness in the (Canadian dollar) is pretty much following on
that trend," said Greg Moore, FX strategist at TD Securities.
    "We're basically in the same place we were before the
election. The division is still there. Basically the market
sense would be that negotiations might be just as difficult as
they were before the election."
    The Canadian dollar ended the North American
session at C$0.9961 to the U.S. dollar, or $1.0039, weaker than
Tuesday's finish at C$0.9918, or $1.0083. It also underperformed
against most other major currencies.
    Overnight, the currency strengthened briefly to a near
three-week high of C$0.9875, or $1.0127, a move shared by its
commodity-linked counterparts. It touched its strongest level
against the euro in nearly a month and had its best
showing against the pound in about two weeks.
    
    EURO CRISIS WEIGHS ON GERMANY
    Also on Wednesday, data signaled that manufacturing in
Germany, Europe's largest economy, is running out of steam three
years into the euro zone debt crisis. 
    That data was a catalyst for the initial risk-asset
sell-off, Moore said, but as the North American session opened,
focus turned to fears the fiscal cliff could crush U.S. economic
recovery.
    Separately, European Central Bank President Mario Draghi
said the bank expects the euro zone economy to remain weak "in
the near term." The ECB is expected to maintain its monetary
policy when the group meets this
week.  
    "The comments from the ECB ... weighed on sentiment a little
bit. So you saw Canada weaken off on that news, and I think U.S.
dollar gained some of that safe-haven flow on the risk-off
reaction to it," said Don Mikolich, executive director, foreign
exchange sales at CIBC World Markets.
    A huge rally in Greece involving nearly 100,000 protesters
that turned violent underscored the ongoing unrest over the
euro-zone crisis. The demonstration was held as Greek lawmakers
neared a vote on an unpopular austerity package to win aid from
lenders. 
    Mikolich expected the trading range for the Canadian dollar
to hold to C$0.9850 to U.S. dollar parity in the near term.
    The price of Canadian government debt rose across the curve.
The two-year government of Canada bond was up 8
Canadian cents to yield 1.077 percent, while the benchmark
10-year bond was up 60 Canadian cents to yield 1.741
percent.