CANADA FX DEBT-Canadian dollar rises on oil, bonds drop

Fri Jan 2, 2009 4:19pm EST
 
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 * Oil price, gloomy U.S. data support Canadian dollar
 * Bonds fall sharply as safe-haven appeal lessens
 * Normal volumes seen next week
 TORONTO, Jan 2 (Reuters) - The Canadian dollar edged higher
against the U.S. currency on Friday, supported by a turnaround
in the price of crude oil and a gloomy U.S. reading of the
manufacturing sector.
 Bonds turned lower as the Toronto Stock Exchange marched
toward a fourth straight session of triple-digit gains.
 The Canadian dollar finished at C$1.2156 to the U.S.
dollar, or 82.26 U.S. cents, up from Wednesday's close at
C$1.2180 to the U.S. dollar, or 82.10 U.S. cents. Canadian
markets were closed on Thursday for New Year's Day.
 A U.S. index of manufacturing activity fell more than
expected to a 28-year low, but its boost to government debt was
short-lived and it also had a fleeting impact on the currency.
See [ID:nWEN2173]
 Oil staged a late morning rally and never looked back,
rising 4 percent to settle above $46 a barrel.
 "It's a pretty cut-and-dried economic and commodity story
that is pushing the currency upwards," said Eric Lascelles,
chief economics and rates strategist at TD Securities.
 Still, the currency has been fairly rangebound for the past
three weeks, he said. With the exception of a couple of
mid-December sessions where it popped into C$1.19 territory,
the Canadian dollar has largely stuck within a range of
C$1.21-C$1.23 to the U.S. dollar.
 Paul Ferley, assistant chief economist at Royal Bank of
Canada, said next Friday's employment reports for December in
both Canada and the United States will be closely watched after
"fairly pronounced" drops in November. But thin markets were
likely exaggerating moves.
 "We'll probably get a firmer indication of the underlying
trend in the currency when trading starts next week," Ferley
said.
 The Canadian dollar slumped nearly 19 percent in 2008, its
worst annual drop versus the U.S. currency in more than half a
century, as plunging commodity prices in the second half of the
year took their toll.
 But the decline came on the heels of an unusually strong
2007 performance against the greenback and the Canadian dollar
did rise against other currencies such as its commodity
cousins, the New Zealand and Australian dollars.
 BONDS DROP
 Government bond prices reversed early strength as rising
North American stock markets gathered momentum and despite
dismal U.S. factory data.
 U.S. and Canadian stocks indexes extended recent rallies to
start the new year, dampening the appeal of safe-haven
government debt. The TSX composite and the Dow Jones average
both gained more than 200 points.
 A U.S. index of manufacturing activity fell more than
expected to a 28-year low, but its boost to government debt was
short-lived. See [ID:nWEN2173]
 "I'm still a little surprised by the magnitude of the
selloff," said TD's Lascelles. "One theme could be that there
was a quest for liquidity and safety going into the end of the
calendar year. Of course that now unwinds so there's scope for
selling government bonds and buying products of other sorts,
including stocks."
 The two-year Canada bond fell 13 Canadian cents to C$102.97
to yield 1.166 percent, while the 10-year bond slid C$1.35 to
C$111.55 to yield 2.841 percent.
 The yield spread between the two-year and 10-year bond was
167.5 basis points, versus 159 at the previous close.
 The 30-year bond declined C$2 to C$125.70 to yield 3.555
percent. In the United States, the 30-year treasury yielded
2.823 percent.
 (Reporting by Ka Yan Ng; editing by Rob Wilson)