Canadian dollar slumps on rate cut expectations

Fri Aug 1, 2008 4:47pm EDT
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 * Canadian dollar closes down 0.3 pct against greenback
 * Market pricing in BoC interest rate cut before year-end
 * Bond prices shaken down after U.S. jobs report
 By John McCrank
 TORONTO, Aug 1 (Reuters) - The Canadian dollar fell against
the U.S. dollar on Friday, its eighth decline in the past nine
sessions, after recent data pointed to a stumbling economy and
the market anticipated the next move the Bank of Canada will
make on interest rates will be a cut.
 Bond prices rallied on a safety bid as stock markets
weakened, and were given an extra boost by the interest rate
 The Canadian currency closed at C$1.0271 to the U.S.
dollar, or 97.36 U.S. cents, down from C$1.0240 to the U.S.
dollar, or 97.66 U.S. cents, at Thursday's close.
 The currency hit a session low of C$1.0299, its weakest
point since June 16. For the week, it ended down 0.7 percent.
 The Canadian economy has been hard hit by the slowdown in
the United States, where it sends over three-quarters of its
exports. American consumers have been struggling under the
weight of a housing slump and tight credit.
 The Canadian economy shrank an annualized 0.3 percent in
the first quarter, and data on Thursday showed it continued to
founder in June, declining by 0.1 percent.
 "The Canadian dollar remains under pressure and I think
it's in large part due to the soft run of Canadian data,
particularly the GDP data, and the growth outlook for Canada is
softening," said Fergal Smith, managing market strategist at
Action Economics.
  The softening outlook for Canadian growth has led
investors to start pricing in an interest rate cut by the Bank
of Canada before the end of the year, Smith said. Until
recently, rising inflation had investors betting the next move
by the Bank of Canada would be a hike.
 Smith said that if the Canadian dollar breaks above
C$1.0325 to the U.S. dollar, momentum would likely carry it
past C$1.0380, the currency's weakest point so far this year,
hit on Jan. 22.
 It is a holiday in most of Canada on Monday.
 Canadian bond prices rallied on weak performances in the
North American stock markets, which upped the safety bid for
government debt, and were given an extra boost by the interest
rate outlook.
 "Yesterday's GDP news is continuing to filter through, in
that the market is believing there are greater odds of the Bank
of Canada cutting rates before year-end and it's going to town
with it," said Michael Gregory, senior economist at BMO Capital
 The two-year bond rose 11 Canadian cents to C$101.53 to
yield 2.878 percent. The 10-year bond climbed 40 Canadian cents
to C$104.85 to yield 3.657 percent.
 The yield spread between the two-year and 10-year bond was
92.4 basis points, up from 86.1 basis points.
 The 30-year bond added 51 Canadian cents to C$115.71 for a
yield of 4.069 percent. In the United States, the 30-year
treasury yielded 4.569 percent.
 The three-month when-issued T-bill yielded 2.42 percent,
down from 2.44 percent at the previous close.
 (Editing by Peter Galloway)