CANADA FX DEBT-C$ weakens on risk sell-off, data

Wed Aug 22, 2012 11:01am EDT
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* C$ eases to C$0.9934 vs. $US, or $1.0066
    * Bond prices pick up across the curve
    * Retail sales unexpectedly fall
    * Bank of Canada, FOMC in focus

    By Solarina Ho
    TORONTO, Aug 22 (Reuters) - The Canadian dollar extended a
retreat on Wednesday from 3-1/2 month highs hit in the previous
session, hitting its weakest level in more than a week against
the U.S. dollar after the government reported an unexpected drop
in the country's retail sales for June.
    The decline in sales confirmed a weaker trend in consumer
spending that will likely trim overall growth in the second
quarter and raises questions about the Bank of Canada's hawkish
slant on monetary policy. 
    "It's consistent with the more general tone of risk-off,"
said David Tulk, chief Canada macro strategist at TD Securities.
    "It's a bit of a consolidation phase for the Canadian dollar
and that's something that's accentuated by the weakness we see
in retail sales."
    Doubts about Europe's progress on its debt crisis and weak
export data from Japan also underscored the headwinds facing the
global economy. Japan's exports slumped the most in six months
in July as shipments to Europe and China tumbled, adding to
concerns over global demand after a string of dire trade figures
from Asia's export engines. 
    At 10:16 a.m. (1416 GMT), the Canadian dollar was
at C$0.9934 versus the U.S. dollar, or $1.0066, weaker than
Tuesday's North American session close at C$0.9897, or $1.0104.
After the retail sales data, it drifted as low as C$0.9948, or
$1.0052, its softest level since Aug. 10.
    Currency strategists have noted in recent days that the
Canadian dollar's rally is overdone, especially in relation to
Europe where the market has gotten ahead of itself.
    "Without anything of substance to justify the rally, we are
seeing a little bit of skittishness also reflected in risk
assets," said Tulk.    
    Bank of Canada's Mark Carney will be taking questions from
reporters later on Wednesday, which could drive moves in the
Canadian dollar.
    "Potentially, Carney has the ability to move the market
quite significantly if he's as hawkish as he was taken to be a
couple of weeks ago on reiterating the tightening bias which
obviously no other central bank has," said Adam Cole, global
head of foreign exchange strategy at RBC Capital Markets in
    Carney said in a speech on Wednesday that the strong
Canadian dollar was not the main cause of the country's poor
export performance.
    "Some blame this on the persistent strength of the Canadian
dollar. While there is some truth in that, it is not the most
important reason," he said, instead noting the overexposure to
the mature and sluggish U.S. market was a more important factor.
    The central bank head, repeating language the Bank used last
month when keeping rates unchanged, said "some modest withdrawal
of the present considerable monetary policy stimulus" might
become appropriate.
    Canadian bond prices picked up across the curve, with the
two-year bond adding 8 Canadian cents to yield 1.142
percent, and the benchmark 10-year bond gaining 42
Canadian cents to yield 1.885 percent.