CANADA FX DEBT-C$ rises with oil surge; larger deficits eyed

Mon Feb 22, 2016 4:43pm EST
 
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(Adds strategist comment; updates deficit outlook, price)
    * Canadian dollar settles at C$1.3712, or 72.93 U.S. cents
    * Bond prices lower across the maturity curve

    By Alastair Sharp
    TORONTO, Feb 22 (Reuters) - The Canadian dollar rose against
its U.S. counterpart on Monday as crude oil prices rallied,
while the federal government said it would run bigger deficits
amid slower growth.
    The Canadian currency strengthened even as the greenback
gained ground against a broad basket of major currencies. 
    Oil prices rose after the International Energy Agency, the
world's oil consumer body, said it expected U.S. shale
production to fall this year and next, potentially reducing the
glut in supplies. 
    The loonie, as Canada's currency is colloquially known,
remains beholden to oil prices, said Rahim Madhavji, president
at KnightsbridgeFX.com. 
    "There's still a lot of uncertainty and not a significant
amount of confidence in the Canadian economy," he said.
    That was illustrated by the government's reduced 2016 growth
forecast of 1.4 percent, down from 2 percent eyed in November.
    Finance Minister Bill Morneau said that will likely make the
deficit larger than the C$10 billion promised by the Liberals
during last year's election campaign as the oil shock hampers
growth, but that government stimulus plans were on track.
 
    "It's a little bit of insurance," Madhavji said of the
likely impact of stimulus. "I don't think it's a whole bunch of
upside but it protects against significant downside in the
loonie," he said.
    The Liberals will unveil their first budget on March 22.
    The Canadian dollar settled at C$1.3712 to the
greenback, or 72.93 U.S. cents, stronger than Friday's official
close of C$1.3769, or 72.63 U.S. cents.
    The currency's strongest level of the session was C$1.3662,
while its weakest level was C$1.3793.
    It got to C$1.3640 in early February and has mostly traded
below C$1.40 since, after testing C$1.47 in mid-January. 
    The currency made much sharper gains against the euro and
the British pound on worries of a possible British exit from the
European Union. 
    U.S. crude prices settled up 6.2 percent at $31.43 a
barrel, while Brent  added 5.1 percent to $34.68. 
    Oil rallied as bets on falling U.S. shale output and a rally
in equities fed the notion that crude prices may be bottoming
after a 20-month collapse. 
    Bearish bets by speculators against the Canadian dollar were
pared further after reaching five-month highs in January. 
 
    Canadian government bond prices were lower across the
maturity curve, with the two-year price down 1.5
Canadian cents to yield 0.456 percent and the benchmark 10-year
 off 6 Canadian cents to yield 1.126 percent.

 (Additional reporting by Fergal Smith; Editing by Frances Kerry
and Chris Reese)