June 5, 2009 / 9:07 PM / in 8 years

CANADA FX DEBT-C$ falls hard, bonds tumble after jobs reports

* C$ at 89.37 U.S. cents; off 1.9 percent for the week

* Bonds mostly lower, hit by jobs data and U.S. rate bets

* Canada sheds 41,800 jobs, jobless rate rises to 8.4 pct

* U.S. nonfarm payrolls fall 345,000, jobless rate up (Adds details)

By Ka Yan Ng

TORONTO, June 5 (Reuters) - The Canadian dollar fell to its lowest level in a week against the U.S. currency on Friday after Canadian and U.S. jobs figures painted a mixed picture of the progress by the two economies as they try to emerge from recession.

Canada lost more jobs than expected in May, while the U.S. data showed the most definitive evidence yet that that economy's severe weakness was diminishing.

Canada shed nearly 42,000 jobs in May and the unemployment rate surged to an 11-year high of 8.4 percent, up from 8.0 percent in April. [ID:nN05253705].

In the United States, employers cut 345,000 jobs last month, the fewest since September and far fewer than forecast, triggering gains by the U.S. dollar. The U.S. unemployment rate, however, raced to 9.4 percent from 8.9 percent in April, its highest level in nearly 26 years. [ID:nN05274048]

The Canadian currency finished at its lowest level since May 27 at C$1.1190 to the U.S. dollar, or 89.37 U.S. cents, and not much firmer than the session low of C$1.1204 to the U.S. dollar, or 89.25 U.S. cents.

It was also down sharply from Thursday's close at C$1.0968 to the U.S. dollar, or 91.17 U.S. cents. For the week, the currency fell 1.9 percent.

"We're seeing some pronounced weakness here, though it largely reflects a generalized strength in the U.S. dollar following the stronger than expected employment numbers out this morning," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

The Canadian jobs data was worse than expected and comes as an unprecedented rally in the currency hammers manufacturers. The Bank of Canada sounded the alarm about the currency's rise on Thursday by stating that a sustained rally could undermine recent significant improvements in economic conditions. [ID:nN0479627]

"I assume it's slightly Canadian dollar negative to the degree that the numbers were technically worse than expected," said Eric Lascelles, chief economics and rates strategist with TD Securities.

"Anyone was dreaming in Technicolor if they thought we were going to continue to see 36,000 job gains on a monthly basis. The realist would have expected a return back to this sort of outcome."

Canada gained about 36,000 jobs in April.

Some market players cited comments by Atlanta Federal Reserve President Dennis Lockhart as having an influence on currency and bond markets.

Lockhart said in an interview published on Friday that with rising market concerns about inflation, he could envision the U.S. central bank eventually raising benchmark interest rates while continuing to run an expansionary monetary policy. [ID:nL5716226]

BONDS MOSTLY LOWER

Canadian bond prices were mostly lower, with the short end hit hardest as market players absorbed the jobs figures and the modest gains in equity markets, and considered the possibility that U.S. rates could rise sooner than expected.

Ferley said the economic data, and influence from U.S. Treasury movements may be putting pressure on bonds.

U.S. Treasury debt prices sank, most strongly in the short end, as some rising expectations the Fed may move sooner rather than later to boost the recommended rate for overnight lending between banks. [ID:nN05421126]

"Certainly that could weigh on markets as well," he said.

The benchmark two-year government bond dropped 21 Canadian cents to C$99.95 to yield 1.276 percent, while the 10-year bond fell 25 Canadian cents to C$102.65 to yield 3.434 percent.

The 30-year bond gained 30 Canadian cents to C$117.10 to yield 3.981 percent. The comparable U.S. Treasury issue yielded 4.640 percent.

Canadian bonds outperformed U.S. treasuries across the curve. The Canadian 30-year bond was 65.9 basis points below the U.S. 30-year yield, compared with 59.1 basis points from Thursday. (Additional reporting by Frank Pingue)

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