CANADA FX DEBT-C$ soft as USD strength offsets Conservative win

Tue May 3, 2011 9:45am EDT
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   * C$ weakens to C$0.9530 to the U.S. dollar, or $1.0493
 * Conservative majority win supportive of CAD
 * Bonds mostly higher, outperform Treasuries
 By Solarina Ho
 TORONTO, May 3 (Reuters) - Canada's dollar weakened on
Tuesday as broad strength in the U.S. currency ended an
overnight rally triggered by the ruling Conservatives' crushing
victory in Monday's federal election.
 The Canadian dollar rose to near three-and-half-year highs
overnight after the Conservatives's finally secured the
majority government it has sought since coming to power in
 But the rally was short-lived after the U.S. dollar came
off three-year lows as a build-up of bets to sell the greenback
based on loose U.S. monetary policy ran out of steam and as
global economic data dampened market sentiment.
 "It's being caught up once again in general U.S. dollar
strength. There's a definite risk-off tone to the market this
morning, so the best thing the Canadian dollar can do is be a
relatively small underperformer," said David Tulk, chief Canada
macro strategist at TD Securities.
 "We're a little bit less comfortable with some of the
outlook for the global economy. We're still thinking about the
Chinese PMI that came out earlier this week ... just generally,
there's a sense that there's enough apprehension out there that
markets are still struggling for a reason to be optimistic."
 Also weighing on the commodity-linked currency, was a slump
in crude prices, which slid on the U.S. dollar strength. [O/R]
 At 8:52 a.m. (1252 GMT), the currency CAD=D4 stood at
C$0.9530 to the U.S. dollar, or $1.0493, off Monday's North
American finish of C$0.9508 to the U.S. dollar, or $1.0517.
 It had hit an earlier high of C$0.9460, or $1.0571 as the
market sighed in relief over the Conservative's win after weeks
of uncertainty over the outcome. Analysts agree the longer term
implications should be positive for the currency.
 "It's positive that Canada now has an outright majority
government," said Adam Cole, global head of FX strategy at RBC
in London.
 "The general trend during the campaign was of CAD
underperformance ... which was driven by the uncertainty
surrounding the surging support for the New Democrat Party.
What we should see now is that trade unwinding."
 TD's Tulk expects the currency to trade between C$0.9460
and above the session open of C$0.9510.
 Some analysts noted that the Conservatives victory is not
entirely bullish for the Canadian dollar.
 The party's focus on fiscal restraint through contained
spending growth in the next few years will be a partial
substitute for more aggressive Bank of Canada interest rate
hikes, Avery Shenfeld, an economist with CIBC World Markets,
said in a note to clients.
 Higher interest rates tend to help currencies strengthen by
attracting international capital flows.
 With election uncertainty out of the way, employment data
this coming Friday, which is expected to show a gain of 22,500
jobs, will be the next key driver for the Canadian dollar.
 Canadian bond prices were mostly higher across the curve,
shadowing movements in the U.S. Treasury market. [US/]
 The two-year bond CA2YT=RR was up 4 Canadian cents to
yield 1.681 percent, while the 10-year bond CA10YT=RR added
35 Canadian cents to yield 3.162 percent.
 Canadian bonds outperformed with the yield on the 10-year
bond widening to 10 basis points below its U.S. counterpart,
compared with 7.5 basis points on Monday.
 (Editing by Jeffrey Hodgson)