March 2, 2011 / 10:21 PM / in 6 years

CANADA FX DEBT-C$ firms but rising oil loses some punch

 * C$ rises to $1.0284 against U.S. dollar
 * Bond prices lower across the curve
 * Five-year bond auction meets decent demand
 * Reuters poll shows C$ to return to US$ parity in a year
 By Ka Yan Ng
 TORONTO, March 2 (Reuters) - The Canadian dollar rose slightly against its U.S. counterpart on Wednesday, and reverted to trading in a tight range as support from stronger oil prices lessened.
 The Canadian currency CAD=D4 finished at C$0.9724 to the U.S. dollar, or $1.0284, up from Tuesday's North American close of C$0.9749 to the U.S. dollar, or $1.0257.
 Oil, a major Canadian export, provided some support as crude oil prices climbed on warnings by Libya that prices would rise and as government forces fought rebels. U.S. and Brent crude were both firmly above $100 a barrel. [O/R]
 But the influence of climbing oil prices appeared to be waning due to fears that too-strong crude prices could choke the global economic recovery.
 "Oil prices in excess of $100 a barrel (are) not necessarily supportive for the Canadian dollar because it has negative implications for global growth and people don't believe these prices are sustainable above this point," said Shaun Osborne, chief currency strategist at TD Securities.
 "So even with the WTI looking quite well supported...it's not necessarily translating into new highs for the Canadian dollar here."
 With little economic data immediately ahead, the Canadian currency is expected to be fairly range-bound, said David Bradley, director of foreign exchange trading at Scotia Capital. He put the currency's range between C$0.9700 and C$0.9800 for the rest of the week.
 "I think there's probably still plenty of interest on the top side around C$0.98 by sovereign-reserve types to buy Canadian dollar to diversify their foreign exchange holdings," Bradley said.
  A Reuters poll on Wednesday showed market players expect the currency will not hold onto its gains as its strength undermines Canada's export-oriented economy.
 Median forecasts in the poll of foreign-exchange strategists have the Canadian dollar easing to C$0.98 to the U.S. dollar in a month's time, before gradually falling back to par with the greenback a year from now. [ID:nN02221448]
 AUCTION MEETS WITH DECENT DEMAND
 Canadian bond prices were lower across the curve, while an auction of five-year bonds met with solid demand.
 Canada's C$3.2 billion auction of bonds due 2016 met with decent demand as the belly of the curve was still attracting interest with the Bank of Canada likely to keep its key interest rate steady for a while longer. [ID:nN02246338]
 "The Bank of Canada met this week and signaled continued patience with policy. That's been supportive for the front of the curve and the belly of the curve. It was a supportive factor for today's auction," said Fergal Smith, managing market strategist at Action Economics.
 Market players have trimmed expectations for a rate hike at the central bank's next three policysetting dates -- in April, May and July. The median view suggests that May will be when the Bank of Canada resumes tightening, according to a Reuters poll last week. [CA/POLL]
 Overnight index swaps, which trade based on expectations for the key central bank rate, imply a fully priced-in rate increase on the bank's Sept. 7 decision date. BOCWATCH
 The two-year bond CA2YT=RR slipped 8 Canadian cents to yield 1.829 percent, while the five-year bond CA5YT=RR fell 20 Canadian cents to yield 2.647.
 In new issues, Bank of Montreal (BMO.TO) sold C$1.5 billion of medium-term notes, while the province of Nova Scotia sold C$400 million of 10-year notes, according to a term sheets seen by Reuters on Wednesday. [ISU-CAN]  (Additional reporting by Solarina Ho; editing by Peter Galloway)                                                      

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