June 2, 2010 / 8:55 PM / 7 years ago

CANADA FX DEBT-C$ hits 2-wk high on rate outlook, bonds sag

4 Min Read

* C$ rises more than a penny to 96.30 U.S. cents

* Bond prices soften across curve as risk appetite grows

* Two-year auction meets with firm demand (Updates to close)

By Ka Yan Ng

TORONTO, June 2 (Reuters) - The Canadian dollar hit a two-week high against the U.S. currency on Wednesday as healthy U.S. economic data spurred risk appetite and the market bought into the notion that the Bank of Canada will continue to raise interest rates.

Figures showing stronger-than-expected U.S. pending home sales for April provided more evidence of U.S. economic recovery. [ID:nN02163984]

That sparked on strong session on North American stock markets, which pushed the Canadian dollar to an intraday high at C$1.0371 to the U.S. dollar, a level not seen since May 18.

"It's just some reversal from yesterday's decent selloff with a little risk-on today and that clearly benefits the Canadian dollar," said Benjamin Reitzes, economist at BMO Capital Markets.

The Canadian dollar CAD=D4 closed at C$1.0384 to the U.S. dollar, or 96.30 U.S. cents, up from C$1.0540 to the U.S. dollar, or 94.88 U.S. cents, at Tuesday's close.

The currency was initially weaker as the market struggled to clarify its view of Tuesday's Bank of Canada moves. The bank raised interest rates on Tuesday, as expected, but gave no clear indication whether it would continue to do so. [ID:nN01103957] [ID:nN01264788] [ID:nN01123836]

Currencies usually strengthen as interest rates rise as higher rates attract capital flows.

As the day progressed, market consensus grew that rates will have to continue to rise this year from current emergency-level lows.

Most of Canada's primary securities dealers, surveyed on Tuesday, maintained their forecasts that interest rates will continue to go up through the year. [ID:nN01126499]

"Canada's fundamentals are still very strong. They will be raising rates eventually and the world doesn't seem to mind if it's a little bit down the road, they'll still invest in the Canadian dollar," said John Curran, senior vice-president at CanadianForex, a commercial foreign exchange firm.

"Comparatively speaking, people are still finding value at these levels. If you look at Canada, compared to everything else out there, it still looks gold."

The market's next major focus will be Friday's U.S. and Canadian employment data, and the currency could stay relatively range bound until those figures are released.

In Canada, the median forecast is for a net gain of 12,500 jobs in May after a record gain of 108,700 in April. The median forecast for the unemployment rate is 8.1 percent. [ID:nECICA] [ID:nN01257964]

Bonds Lower

Canadian bond prices slumped across the curve as investor sentiment shifted to riskier assets such as stocks.

An C$3 billion auction of two-year government bonds met with solid demand, the day after the Bank of Canada raised interest rates and left markets to deliberate on the tempo of future rate increases. [ID:nN02174312] [CA/AUC]

"There will be a lot of hand-wringing before each meeting but ultimately we think (the Bank of Canada) will be nudged into rate moves for most of the meetings for the remainder of the year," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

The two-year Canadian government bond CA2YT=RR sagged 11 Canadian cents to yield 1.764 percent, while the 10-year bond CA10YT=RR fell 78 Canadian cents to yield 3.379 percent.

The Canadian two-year bond was 95.4 basis points above the U.S. 2-year yield, compared with 94.5 basis points on Tuesday. (Reporting by Ka Yan Ng; editing by Peter Galloway)

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