CANADA FX DEBT-C$ softens on the week, but avoids C$1.10

Fri Jan 17, 2014 4:29pm EST
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* Canadian dollar at C$1.0976, or 91.11 U.S. cents
    * Divergent paths of Canada, U.S. widen gap between
    * Upcoming Bank of Canada rate decision highlights
data-heavy week
    * Bond prices higher across the maturity curve

    By Alastair Sharp
    TORONTO, Jan 17 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Friday but staved off a breach
of C$1.10 as the divergent paths of the two countries' recent
economic data and monetary policy outlooks force investors to
reassess the loonie's value.
    The currency slipped 0.7 percent, or three-quarters of a
cent, on the week to hit a four-year low against the greenback
and has failed to gain ground on most other major currencies
after falling 2.5 percent last week. 
    Traders will have another chance to test the psychologically
important C$1.10 level next week when the Bank of Canada holds a
policy-setting meeting mid-week that is book-ended by
significant data reports. It traded as weak as C$1.0992 on
    "Our view is that you are going to have something fairly
dovish from the bank, but they are not going to change their
growth outlook for Canada," said Mark Chandler, Royal Bank of
Canada's head of Canadian fixed income and currency strategy.
    The central bank, which has held its key rate at 1 percent
since 2010, cut its 2014 growth projections to 2.3 percent in
October at the same time it dropped its rate-hike bias.
    The loonie, as Canada's currency is colloquially known, has
weakened sharply recently as a string of dismal data points cast
a pessimistic pall on the country's economic outlook.
    Exacerbating the fall, the more dovish tone from Canada's
central bank has contrasted sharply with the more hawkish tilt
from the Federal Reserve, which has been emboldened by robust
U.S. economic data.
    U.S. industrial and housing data on Friday helped support
the view the world's largest economy is improving enough to keep
the Fed's stimulus reduction on track. 
    The Canadian dollar ended the North American
trading session changing hands at C$1.0976 to the greenback, or
91.11 U.S. cents, weaker than Thursday's close of C$1.0925, or
91.53 U.S. cents. It ended last week at C$1.0901.
    Canadian manufacturing sales and wholesale trade data is due
on Tuesday, with retail sales numbers out on Thursday and an
inflation metric expected on Friday. 
    Brad Schruder, director of foreign exchange sales at BMO
Capital Markets, said opinion on the likely direction of the
currency pair depended on whether an observer believes the level
of optimism about the U.S. economy and the pessimism about
Canada are justified.
    "The reality is it is too soon to tell," he said. "The
market has not found equilibrium in dollar/Canada, and as long
as it does not do that, the risk is higher, not lower." 
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 3 and a half
Canadian cents to yield 1.025 percent and the benchmark 10-year
 up 19 Canadian cents to yield 2.504 percent.