CANADA FX DEBT-C$ helped, then hurt, by Cyprus news

Mon Mar 25, 2013 4:39pm EDT
 
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* C$ at C$1.0212 vs US$, or 97.92 U.S. cents
    * Bond prices mostly higher
    * January GDP key data this week

    By Alastair Sharp
    TORONTO, March 25 (Reuters) - The Canadian dollar held on to
slight gains against the U.S. dollar on Monday, initially buoyed
by a rescue deal between Cyprus and its lenders but then hobbled
by fears of broader weakness in Europe's banks.
    Cyprus agreed to shut down its second-largest bank and
imposed heavy losses on big depositors to secure a 10-billion
euro rescue plan, a deal a senior euro zone official said could
become a template for other regional banking problems.
 
    "Everything shifted rather quickly during the North American
session and (Dutch Finance Minister Jeroen) Dijsselbloem's
comments that this was a template for other bank restructuring
sent markets into a tailspin," said Matt Perrier, managing
director of foreign exchange sales at BMO Capital Markets.
    Such an approach would mark a radical departure for euro
zone policy after three years of crisis in which taxpayers
across the region have effectively been on the hook for
resolving problem banks and indebted governments.
    At one point the loonie, as Canada's currency is
colloquially known, touched C$1.0188, its best performance in a
week. 
    "It spent a good part of the morning grinding back up into
the 1.0220s and was stuck in a range the whole afternoon," said
David Bradley, director of foreign exchange trading at
Scotiabank.
    The currency ended the session at C$1.0212 versus
the greenback, or 97.92 U.S. cents, still stronger than Friday's
North American session close at C$1.0233, or 97.72 U.S. cents.
    "The relief for the euro at least for the Cyprus deal has
been very short-lived," said Charles St-Arnaud, economist and
currency strategist at Nomura Securities in New York.
    "It seems like investors are turning back to looking at the
broad issue of the euro zone. The Cyprus deal is good news, but
the rest of the zone is still (in trouble)."
    Worries about an economic slowdown in the currency bloc,
political uncertainty in Italy, and prospects of the European
Central Bank easing monetary policy in coming months to support
growth were also expected to weigh on the currency. 
    The single currency lost more than two Canadian cents to
reach its weakest level since mid-January. 
    The key data this week for the Canadian dollar will most
likely be inflation data on Wednesday and the monthly gross
domestic product figures on Thursday. 
    "For what we've seen so far for January, growth will be
relatively weak, said St-Arnaud, who is expecting no growth at
all in January. "That will probably bring the focus for
investors to the Canadian economy, that it's not as strong as it
was only a year ago."
    In addition on the domestic front, a Bank of Canada deputy
governor speaks on Tuesday and inflation data are due on
Wednesday, but BMO's Perrier expected Cyprus to remain a focus.
    "We've got a few domestic things to keep our eye on, but for
the most part the market focus is going to be on Cyprus and any
fallout from developments there," he said.
    The loonie has come off a weak C$1.0343 level from early in
March but will likely struggle to push past C$1.0185 to C$1.0125
over the course of this week, Perrier said. 
    Data released by the Commodity Futures Trading Commission on
Friday showed traders had once again increased their short
positions in the Canadian dollar, indicating an expectation that
the currency will weaken. 
    Prices for Canadian government debt were mostly higher
across the curve, though the two-year bond was off
half a Canadian cent to yield 0.997 percent. The benchmark
10-year bond added 9 Canadian cents to yield 1.810
percent.