CANADA FX DEBT-C$ firms after volatile reaction to Fed

Wed Nov 3, 2010 4:35pm EDT
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 * C$ ends at 99.32 U.S. cents in see-saw session
 * Bonds prices soften across curve
 (Updates to close)
 By Claire Sibonney
 TORONTO, Nov 3 (Reuters) - The Canadian dollar rose against
its U.S. counterpart in a volatile session on Wednesday,
keeping parity in sight after a brief slip, as markets absorbed
the Federal Reserve's bold push to breathe life into a
struggling U.S. economy.
 After months of speculation, the Fed launched a risky new
policy to buy $600 billion more in government bonds, aimed at
further lowering borrowing costs for consumers and businesses
still suffering from the financial crisis. [ID:nN03287174]
  Markets were generally priced for the Fed initially to
commit to buying at least $500 billion in U.S. Treasuries over
several months.
 While U.S. stocks got a small lift and the greenback
softened in reaction, longer-dated Treasuries sold off.
 "There doesn't seem to be a lot of conviction here," said
Shaun Osborne, chief currency strategist at TD Securities.
 Osborne noted that with U.S. bond yields grinding higher
it's going to be difficult for the U.S. dollar to sustain its
current weakness.
 "While the (U.S.) dollar might stay quite soft in the short
run, I don't think this is perhaps the trigger for a further
immediate selloff," he said.
 The Canadian dollar see-sawed in erratic trade following
the announcement, hitting both session highs and lows.
 The currency finished at C$1.0068 to the U.S. dollar, or
99.32 U.S. cents, up from Tuesday's close of C$1.0095 to the
U.S. dollar, or 99.06 U.S. cents.
 "We'll see what the overnight market does but I won't be at
all surprised to see some (U.S. dollar) short-covering pushing
us back towards the C$1.01 area over the course of the next few
hours," Osborne added.
 Overall, the Canadian dollar is expected to gain momentum
against its struggling U.S. counterpart and trade around parity
for much of the next year, supported by strong fundamentals, a
Reuters poll showed on Wednesday. [ID:nN03102293]
 Earlier, investors were also assessing the potential impact
of U.S. midterm election results on riskier investments, after
Republicans took control of the House of Representatives and
weakened the Democratic majority in the Senate. [ID:nUSVOTE]
 "With the Republican victory there are some positives for
the U.S. dollar, mostly being fiscal restraint," said Tom
Nakamura, fixed-income portfolio manager at AGF Investments.
 "On the negative side ... it might mean that the Fed has to
do more of the heavy lifting in terms of stimulus for longer,
which would weigh on the U.S. dollar. What it comes down to for
the Canadian dollar is what is good for the U.S. economy in the
long term."
 Canadian government debt prices were little changed as
investors bet the Fed's decision had already been priced in.
 "This is potentially the last sort of pump of the bond
bubble inflating here so it's hard to see long term rates in
the U.S. dropping significantly further than they have
already," said Osborne.
 The two-year bond CA2YT=RR gained half a Canadian cent to
yield 1.421 percent, while the 10-year bond CA0YT=RR was flat
to yield 2.874 percent.
 In new issues, Canada's auction of five-year bonds met with
firm demand before the Fed's announcement even as the belly of
the curve, which has benefited from easier monetary policy, is
seen getting expensive for investors. [ID:nN03110651]
 (Reporting by Claire Sibonney; editing by Rob Wilson)