CANADA FX DEBT-After nearing US$ parity, C$ sinks on ECB news

Thu Aug 2, 2012 4:41pm EDT
 
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* C$ ends at C$1.0072 vs US$, or 99.29 U.S. cents
    * Currency soared to 99.98 U.S. cents ahead of ECB
    * Sank to session low of C$1.0085 on ECB disappointment
    * Bonds higher across curve; TD cuts yield forecasts

    By Jennifer Kwan
    TORONTO, Aug 2 (Reuters) - The Canadian dollar pulled back
from near parity with the U.S. currency to close weaker on
Thursday after European Central Bank President Mario Draghi
disappointed investors by not unveiling immediate measures to
combat the euro zone debt crisis.
    Market expectations were high heading into a news conference
by Draghi after he recently said he would do "whatever it takes
to preserve the euro." Many investors thought this would mean
purchases of Italian and Spanish bonds.
    However, Draghi stopped short of providing quick action.
Instead, he said the ECB will draw up a mechanism in the coming
weeks to make outright purchases to stabilize stressed euro zone
borrowing costs. 
    "Expectations got a little inflated. Draghi deflated those
expectations," said John Clinkard, chief economist at Deutsche
Bank Canada.
    Global stock markets and the euro tumbled and the Canadian
dollar touched C$1.0085 versus the greenback, or 99.16 U.S.
cents, its weakest in nearly a week. 
    "It seems the ECB was caught off guard by the aggressive
rhetoric from Draghi last week," said Dean Popplewell, chief
currency strategist at OANDA.
    "Draghi came out of the gate swinging. Once the market
realized there was no firm action and that this is still a work
in progress ... risk-off was again applied rather quickly."
    The Canadian dollar ended at C$1.0072 against the
U.S. currency, or 99.29 U.S. cents, pulling back from a session
high C$1.0002, or 99.98 U.S. cents reached as Draghi began the
press conference. On Wednesday, the currency finished at 99.48
U.S. cents.
    The Canadian dollar has traded at a lower value than its
U.S. counterpart since mid-May and parity is seen as a key
psychological level.
    Avery Shenfeld, chief economist at CIBC World Markets, said
he expects that by September the ECB will be in a better
position to announce the details.
    The disappointment follows Wednesday's statement by the
Federal Reserve, in which the U.S. central bank said the economy
was weaker but left policy on hold.
    The Fed stopped short of offering new monetary stimulus even
as it signaled further bond buys could be in store, sending
riskier assets lower. 
        
    BONDS HIGHER
    The latest flight from risk drove Canadian bond prices
higher across the curve. The two-year bond rose 5
Canadian cents to yield 1.067 percent, and the benchmark 10-year
bond rose by 37 Canadian cents to yield 1.672
percent.    
    The uncertain global outlook prompted TD Economics to lower
its forecasts for Canadian government bond yields on Thursday.
    TD now sees the 10-year yield falling to 1.55 percent in the
third-quarter after hitting a record low of 1.565 percent last
month. 
    The bank also sees the 30-year yield, which hit
2.194 percent last month, reaching a record low 2.15 percent
this quarter. The 30-year yield was at 2.25 percent on Thursday.