CANADA FX DEBT-C$ gains against stronger US$ as oil rallies

Wed Aug 3, 2016 4:42pm EDT
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(Adds analyst quotes, updates prices)
    * Canadian dollar settles at C$1.3071, or 76.51 U.S. cents
    * Loonie touches its weakest since July 29 at C$1.3148
    * Bond prices flat to lower across steeper maturity curve

    By Fergal Smith
    TORONTO, Aug 3 (Reuters) - The Canadian dollar edged higher
against its broadly firmer U.S. counterpart on Wednesday as oil
rallied and risk appetite improved.
    Oil prices jumped after U.S. data revealed a
larger-than-expected gasoline draw which offset a surprise build
in crude stockpiles. U.S. crude oil futures settled $1.32
higher at $40.83 a barrel. 
    Canada is a major oil exporter.
    Wall Street stabilized after losses on Tuesday, adding to
support for the risk-sensitive loonie. Gains on Wall Street came
as data showed U.S. private employers added 179,000 jobs in
July, above economists' expectations.        
    "Markets are now turning to the (U.S.) non-farm payrolls
number on Friday, but for the time being we will see the
Canadian dollar be driven by broader risk appetite in financial
markets as well as oil and interest rate spreads, all of which
are pointing to a higher Canadian dollar today," said Scott
Smith, senior market analyst at Cambridge Global Payments.
    The Canada-U.S. two-year bond spread has compressed from -60
basis points in January to -11 basis points on Wednesday,
reducing the premium that investors earn on U.S. bonds.
    The Canadian dollar ended the day at C$1.3071 to
the greenback, or 76.51 U.S. cents, stronger than Tuesday's
close of C$1.3102, or 76.32 U.S. cents.
    The currency's strongest level of the session was C$1.3064,
while it touched its weakest since July 29 at C$1.3148.
    The Canadian dollar is expected to weaken slightly against
the U.S. dollar over the coming months, a Reuters poll found,
with a sluggish domestic economy and lower oil prices seen
weighing on the commodity-linked currency. 
    Canadian government bond prices were flat to lower across
the maturity curve, with the two-year bond unchanged
to yield 0.558 percent and the benchmark 10-year 
falling 22 Canadian cents to yield 1.100 percent.
    The curve steepened as the spread between the 2-year and
10-year yields widened by 2.3 basis points to 54.2 basis points,
indicating underperformance for longer-dated maturities. Last
week the spread touched its narrowest since June 2008 at 48.3
basis points.
    Canada's international trade data for June and employment
report for July are awaited on Friday. 

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
Diane Craft)