CANADA FX DEBT-C$ slumps on commodities, risk aversion

Wed Jun 3, 2009 4:56pm EDT
 
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 * C$ falls more than 2 U.S. cents
 * U.S. data suggests road to recovery still bumpy
 * Bonds head higher as equities tumble
 * Bank of Canada in focus on Thursday
 (Adds details throughout, additional comment)
 By Ka Yan Ng
 TORONTO, June 3 (Reuters) - Reduced risk appetite pulled
the Canadian dollar sharply lower against the U.S. currency on
Wednesday as equity markets and oil prices extended their
declines.
 The currency fell as low as C$1.1119 to the U.S. dollar, or
89.94 U.S. cents, in concert with its commodity-led cousins,
the New Zealand and Australian dollars, which suffered deeper
losses.
 That is one of the sharpest one-day drops since the height
of the financial crisis in the fall, said Doug Porter, deputy
chief economist at BMO Capital Markets.
 The currency ended the session at C$1.1084 to the U.S.
dollar, or 90.22 U.S. cents, down from C$1.0810 to the U.S.
dollar, or 92.51 U.S. cents, at Tuesday's close.
 The U.S. dollar rose against a basket of major currencies
as a sharp fall in stocks trimmed risk appetite in the market
and rekindled safe-haven demand for the greenback.
[ID:nN0382117]
 "Some of the currencies that have done the best on the
upside on the increasing risk appetite, improvement in equity
markets, improvement in commodity markets, they're all finding
those positions reversed. Canada is in that pack," said Mark
Chandler, fixed income strategist, at RBC Capital Markets.
 Global stocks and oil fell hard after a batch of weak U.S.
economic data and an unexpected rise in crude inventories
suggested the road to recovery is still bumpy. [MKTS/GLOB]
[ID:nSP477138]
 The next major event on tap for market players is the Bank
of Canada's rate announcement on Thursday. The rate decision
itself should produce no surprises since the central bank has
conditionally committed to leaving interest rates low,
currently at 0.25 percent.
 But market watchers hope the bank will address the
currency's surge -- in May alone it rose a massive 9.3 percent
-- as well as offer further guidance on its framework for
unconventional policy. [ID:nN02506478]
 "I think it's basically going to be a 'lay of the land'
where they'll probably suggest that overall it looks like
things have modestly improved," said Porter.
 "But they'll probably put out a few major caveats, one of
which is that we're not completely out of the woods by any
means, and also they will probably raise the strengthening of
the Canadian dollar as a potential dampener on any recovery."
 BONDS GAIN
 Canadian bond prices were higher across the curve, partly
benefiting from the debt's safe haven status in light of
declining equity markets.
 Toronto's main index fell 2.8 percent on Wednesday, while
U.S. stocks were also in the red.
 Some economic reports released on Wednesday suggested the
economic recovery in the United States may have stalled, giving
bonds a small bump. [ID:nN03345672]
 "It's a modest decline in yields, given what we've seen in
equities, said Chandler. "But to be fair, (the data) didn't add
a whole lot to the mix."
 The benchmark two-year government bond rose 14 Canadian
cents to C$100.19 to yield 1.153 percent, while the 10-year
bond gained 70 Canadian cents to C$103.50 to yield 3.335
percent.
 The 30-year bond rose 89 Canadian cents to C$117.49 to
yield 3.960 percent. The comparable U.S. Treasury issue yielded
4.442 percent.
 Canadian bonds outperformed U.S. treasuries across the
curve. The Canadian 30-year bond was 48.1 basis points below
the U.S. 30-year yield, nearly unchanged from Tuesday.
 (Reporting by Ka Yan Ng; editing by Rob Wilson)