CANADA FX DEBT-C$ falters vs greenback on Europe concerns

Tue Jul 24, 2012 4:27pm EDT
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* C$ ends at C$1.0204 vs US$, or 98.00 U.S. cents
    * Retail sales weaker than expected; sales volume up
    * Global stocks lower on worries about Spain, Greece
    * Bond prices little changed across the curve

    By Jennifer Kwan
    TORONTO, July 24 (Reuters) - The Canadian dollar sank to a
near two-week low against its U.S. counterpart on Tuesday as
investors were rattled with worry about soaring Spanish bond
yields and uncertainty around Greece's membership in the euro
    Spanish yields climbed above 7.6 percent on its 10-year bond
, reflecting a growing belief that the country will
need a bailout that the euro zone can barely afford.
    Meantime, EU officials said Greece had little hope of
meeting the terms of its bailout, casting fresh doubt on its
future in the euro zone. 
    "I would say Spain is really what matters because Greece is
relatively small. It's mainly Spain because it has a lot of ties
to other countries. In terms of size, it's the fourth-biggest
economy in the euro area," said Charles St-Arnaud, economist and
currency strategist at Nomura in New York.
    "Any signs it could leave or need a bailout is more
    The Canadian dollar ended at C$1.0204 versus its
U.S. counterpart, or 98.00 U.S. cents. It hit a low of C$1.0227,
its weakest since July 12. On Monday, the currency finished at
C$1.0168 to the greenback, or 98.35 U.S. cents.
    Worries about the instability in the euro zone overshadowed
a domestic retail sales report with some bright spots. Canadian
retail sales rose by a weaker-than-expected 0.3 percent in May,
but a healthy jump in sales volume and heavy shopping for food,
beverages and clothing ignited hopes that consumers would help
keep the economy out of the doldrums. 
    "It was a decent number for Canada but in the grand scheme
of things it's going to get lost in translation," John Curran,
senior vice president at CanadianForex, said of the retail sales
    "It's a positive number. But any good news that stems from
that will eventually be negated by the European situation."
    The currency had already been pressured earlier in the
session by data that showed the private sector across the whole
17-nation euro area shrank for a sixth straight month in July,
mainly due to weakness in manufacturing, putting the region on
track to fall back into recession. 
    The slowdown in German industrial activity was the biggest
surprise for market analysts, contracting in July at its fastest
pace in three years. 
    The European situation also overshadowed data that showed
China's manufacturing output in July grew at its fastest pace in
nine months, easing fears of a sharp slowdown in the world's No.
2 economy. 
    "It's a bit of good news after some disappointing numbers
out of China but one number doesn't a trend make, so I think the
market is more clearly focused on Europe at this point and
concerns over spreads and everything else that's going on
there," said Matt Perrier, director of foreign exchange sales at
BMO Capital Markets.
    As well, U.S. stocks, typically a barometer of investors'
risk appetite, fell on signs the euro zone debt crisis is
hurting U.S. companies. 
    United Parcel Service, seen by many as a proxy for
economic activity, reported quarterly results that missed
forecasts and cut its 2012 outlook, citing uncertain global
economic conditions. 
    The Canadian currency notched a mixed performance against
major currencies, outperforming the euro, but underperforming
the Japanese yen. 
    St-Arnaud said he expects the currency to trade in a range
of C$1.0140 to C$1.0260-80 against the greenback.
    Canadian bond prices were little changed across the curve
with the two-year bond down 2 Canadian cents to yield
0.937 and the benchmark 10-year bond down 2 Canadian
cents to yield 1.585 percent. The 30-year bond was
unchanged to yield 2.205 percent.