CANADA FX DEBT-C$ drops to near 5-year low as oil prices fall

Thu Oct 16, 2014 10:06am EDT
 
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* Canadian dollar at C$1.1325 or 88.30 U.S. cents
    * 10-yr bond yield lowest since May 2013

    By Leah Schnurr
    TORONTO, Oct 16 (Reuters) - The Canadian dollar weakened
against the greenback on Thursday as oil dropped toward $80 a
barrel and as markets around the world were driven lower by
concerns about the health of the global economy.
    The loonie was also pressured by disappointing data at home
that showed Canadian factory sales fell in August by the most
since May 2009. 
    The decline left the Canadian dollar not far from the more
than five-year low of C$1.1385 it hit on Wednesday. The currency
has lost about 6 percent since July as the greenback has
rallied, but losses have accelerated this week in the midst of a
global market rout, particularly in oil, a major Canadian
export.
    While the C$1.1350 area should provide some resistance, the
loonie could move quickly if it breaks through that threshold,
said David Tulk, chief Canada macro strategist at TD Securities
in Toronto.
    TD forecasts the Canadian dollar will be at C$1.15 at end of
the first quarter of 2015 and at C$1.12 at the end of this year.
    "As this oil story becomes more of a topic du jour in terms
of the currency and as oil prices continue to push lower from
here, I think it does start to perhaps get us to that C$1.15
target maybe a little bit faster than we previously thought," 
Tulk said.
    The Canadian dollar was at C$1.1325 to the
greenback, or 88.30 U.S. cents, weaker than Wednesday's close of
C$1.1258, or 88.83 U.S. cents.
    Recent weak U.S. and Chinese economic data, along with
anxiety about the euro zone's stalling recovery, has heightened
concerns over weaker than anticipated global growth. As a major
trading partner of the United States, Canada's economic hopes
lie in an acceleration of growth south of the border.
    "If the U.S. can continue to perform reasonably well, and
that's a big if, then Canada can hide under the shadow that the
U.S. provides, so hopefully that will be the case," Tulk said. 
    "But if the U.S. is hit from confidence or any other global
themes that stall the U.S. recovery, Canada will continue to
languish."
    Investors attention will start to turn to Friday's inflation
report, the most significant data point of the week. The annual
inflation rate is expected to dip to 2 percent in September,
likely giving the Bank of Canada plenty of room to stay on the
sidelines as far as an interest-rate move is concened. 
    From there, focus will likely quickly shift to the bank's
monetary policy report, which will be released next week, along
with the bank's updated economic forecasts.
    Canadian government bond yields continued to drop, with the
benchmark 10-year yield at its lowest level since
May 2013 at 1.859 percent, up 52 Canadian cents in price.
    The two-year was up 7 Canadian cents to yield
0.883 percent, its lowest yield level since June 2012. 

 (Editing by Peter Galloway)