CANADA FX DEBT-C$ slips ahead of European summit

Wed Jun 27, 2012 4:59pm EDT
 
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* C$ ends at C$1.0255 vs US$, or 97.51 U.S. cents
    * Markets eye Europe summit Thursday and Friday
    * Underperforms Aussie, New Zealand dollars
    * TD Securities pushes back forecast for rate hike
    * Bonds edge higher across curve

    By Jennifer Kwan
    TORONTO, June 27 (Reuters) - Canada's dollar stumbled
against its U.S. counterpart on Wednesday along with the euro as
investor hopes faded that new measures from a European Union
summit this week would resolve the region's debt crisis.
    European leaders remained unusually divided before the
summit on Thursday and Friday over how to contain the bloc's
spreading debt crisis, now in its third year.
  
    The euro fell for a third day against the U.S. dollar on
Wednesday ahead of the summit. 
    "It's not so much of a Canadian dollar story. It's just
general market sentiment leading up to the summit," said David
Tulk, chief Canada macro strategist at TD Securities.
    "There's two things we want to keep an eye on. One is the
announcement of near-term tools to keep Italian and Spanish
yields under control. The second is ... if we can get some
softening on (German Chancellor Angela) Merkel's positioning
with respect to adopting euro bonds or a pan-Europe banking
regulation system or something along those lines."
    Merkel had said total debt liability would not be shared in
her lifetime, giving little support to Italian and Spanish pleas
for immediate action. Rome and Madrid have seen their borrowing
costs spiral to a level which for Spain at least would not be
sustainable. 
    The Canadian currency ended at C$1.0255 to the
greenback, or 97.51 U.S. cents, down slightly from its Tuesday
finish at C$1.0240 to the greenback, or 97.66 U.S. cents.
    "We don't expect much from the summit. Actually you can see
there is a lot of divergence between Germany and other European
leaders. It's not looking like we're going to get a new pact
from there," said Hendrix Vachon, senior economist at Desjardins
Group.
    "So the uncertainties are still there after the summit. In
that situation, it will be a bad climate for currencies except
for the U.S. dollar."
    On Wednesday, the Canadian dollar notched a mixed
performance against major currencies. It underperformed the
commodity-linked Australian and New Zealand dollars.
    Indeed, the uncertainty about the global economy has
prompted TD Securities to push back its forecast on when the
Bank of Canada will next hike rates. It now sees the first hike
of 25 basis points in March 2013 from its previous call at the
third quarter of this year.
    "The global outlook has deteriorated by more than what we
had expected," said TD's Tulk. He added the surprise
announcement by the federal government to clamp down on mortgage
regulations "has removed the pressure from the Bank to hike this
year."
    The government tightened conditions for both borrowers and
lenders last week to put the brakes on home buying and deflate a
possible housing bubble before it pops. The new rules and
guidelines are expected to make it harder for home buyers and
homeowners to take on massive debt.    
    Canadian bond prices were largely higher across the curve
with the two-year Canadian government bond up 4
Canadian cents to yield 0.994 percent, while the benchmark
10-year bond added 19 Canadian cents to yield 1.725
percent.