February 4, 2009 / 9:30 PM / 9 years ago

CANADA FX DEBT-C$ falls in volatile session, risk appetite fades

* C$ falls versus greenback after early session rally

* Currency trades in wide range as sentiment shifts

* Bond prices extend fall after less dire U.S. data (Adds details, comments and closing numbers)

By Frank Pingue

TORONTO, Feb 4 (Reuters) - The Canadian dollar closed lower on Wednesday after a session that included big swings in both directions as pressing concerns about the global economy more than offset an earlier desire to take on riskier assets.

Concerns about the U.S. government’s plan to stabilize the bank sector prompted a move back into the greenback, considered a safe-haven play, and undid the Canadian currency’s early move to its highest level since Friday.

“It’s risk on, risk off. And the switch is back in the off position at the moment and so the (U.S.) dollar does better,” said Shaun Osborne, chief currency strategist at TD Securities. “But it’s very thin and it’s still a market where relatively small orders can push (the currency) around.”

The Canadian dollar closed at C$1.2320 to the U.S. dollar, or 81.17 U.S. cents, down from C$1.2301, or 81.29 U.S. cents, at Tuesday’s close.

This was little changed from the previous two North American session closing levels. But during the session on Wednesday it rallied as high as C$1.2226, or 81.79 U.S. cents, and fell as low as C$1.2440, or 80.39 U.S. cents.

Canada’s currency got hammered during the overnight session given the continued uncertainty about the global economy and news that Fitch downgraded Russia’s long-term foreign debt, both which convinced traders to unload riskier assets.

But an early rally in North American equity markets after U.S. data came in better than expected paved the way for the Canadian dollar to stage a rebound. Osborne said a good chunk of the currency’s early gain was stop-loss driven as traders were caught off guard by its move through C$1.23.

U.S. data showed the vast service sector shrank again in January but by less than expected, which was welcome news for investors confronted by a relentless flow of bad data.

The Canadian dollar spent the first half of the afternoon in a tight range before turning lower as uncertainty about the U.S. government’s plan to stabilize the bank sector managed to overshadow the early drivers of the currency.

Bank of America Corp (BAC.N) shares fell below $5 for the first time since 1990 and declined for a fifth straight day on concern the government might nationalize the largest U.S. bank and wipe out shareholders. [ID:nN04309899]

BOND PRICES DROP

Canadian bond prices ended down across the curve alongside the U.S. Treasury market as the latest U.S. data came in better than expected and sapped investor demand for more secure government debt.

Apart from the service sector data, another U.S. report showed private employers cut fewer jobs in January than was expected. The more important U.S. non-farm payrolls report due on Friday is expected to show 525,000 jobs were lost throughout the economy in January.

Another drag on bond prices was dealers who considered the potential impact of U.S. government fiscal stimulus plans that will aim to combat the worst financial crisis since the Great Depression.

“There’s a little more optimism and hope that this bailout package in the U.S. will be effective and that will give the (U.S.) economy the boost it needs and that’s going to help stocks and hurt bonds,” said Benjamin Reitzes, economist at BMO Capital Markets.

Dealers also avoided huge commitments ahead of Friday’s Canadian jobs figures for January, which are expected to show the economy bled more jobs and support calls for the Bank of Canada to cut its key rate below the current 50-year low.

Other Canadian data due this week include building permits for December and January’s Ivey Purchasing Managers Index, both due on Thursday.

The two-year bond dropped 1 Canadian cent to C$102.53 to yield 1.335 percent, while the 10-year bond dropped 37 Canadian cents to C$109.10 to yield 3.116 percent.

The 30-year bond dropped 35 Canadian cents to C$121.10 to yield 3.780 percent. In the United States, the 30-year treasury yielded 3.659 percent.

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