March 5, 2009 / 10:18 PM / 8 years ago

CANADA FX DEBT-Risk aversion knocks down C$, bonds rally

4 Min Read

* Canadian dollar weakens as risk aversion returns

* BoE, ECB cut interest rates; see weak growth

* Bonds rise on equities slide, BoE asset buying program (Adds details)

By Ka Yan Ng

TORONTO, March 5 (Reuters) - The Canadian dollar fell on Thursday as the prospect of sustained global economic weakness reignited risk aversion plays and boosted safe haven flows to the U.S. dollar.

The Canadian dollar finished at C$1.2884 to the U.S. dollar, or 77.62 U.S. cents, down from C$1.2754, or 78.41 U.S. cents, at Wednesday's close.

The Canadian dollar rallied more than 1 U.S. cent on Wednesday as investors bought up riskier assets, spurred partly by expectations that China would introduce new stimulus measures.

But it handed back those gains on Thursday as China said it would ramp up deficit spending this year but did not announce an expansion of the country's two-year economic stimulus plan as the market had hoped. [ID:nSP395150].

This sent global stock markets lower. Stocks were hit again when auditors at General Motors warned of possible bankruptcy at the automaker.

"One doesn't have to look any further than the equity markets. There is very, very clear risk aversion returning to the market," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

Fears of what Friday's U.S. nonfarm payrolls report would bring were also weighing on a broad number of currencies, Strauss said. Analysts expect U.S. job losses of 648,00 in February, with some forecasting losses as high as 800,000.

The Canadian currency hit a three-month low earlier this week after the Bank of Canada cut interest rates to a record low. It headed in that direction again on Thursday as the European Central Bank and the Bank of England also reduced rates to historic lows.

A 4-percent drop in oil prices to below $44 a barrel also weighed on the Canadian dollar. Oil is a key Canadian export and often sets direction for the currency.

The C$1.30 level still represents a key psychological mark for the Canadian dollar that, if breached, could set the stage for it to hit lows not seen since 2004. Several attempts at reaching C$1.30 have been made over the past week.

Bonds Rise

Bonds were higher across the curve as investors shunned stocks after General Motors warned of possible bankruptcy, while the Bank of England's moves may have also been supportive.

North American stocks slumped on the GM news, extending losses from the negative tone set overnight with disappointment stemming from China.

"Equity market dreariness is bleeding into bonds," said Eric Lascelles, chief economics and rates strategist at TD Securities.

He also noted that the Canadian curve flattened as it rallied, an unusual combination that he attributed to the Bank of England's plan to start boosting the economy's supply of money through asset buying. [ID:nL5901755]

"It sets speculation ablaze that the U.S. and Canada could also start buying government bonds, and that would drive yields sharply downwards if they did that," Lascelles said.

Bank of Canada Deputy Governor Pierre Duguay said on Thursday that plans worldwide to resolve the financial crisis were good but needed to be well-executed.

He did not elaborate on the Bank of Canada's plans to pump money into the system. The bank has pledged to provide details in April following its Monetary Policy Report. [ID:nN05318733]

The two-year bond edged up 2 Canadian cents to C$103.09 to yield 0.947 percent. The 10-year bond gained 51 Canadian cents to C$106.97 to yield 2.954 percent.

The 30-year bond advanced C$1.05 to C$124.40 and yielded 3.614 percent. (Editing by Peter Galloway)

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