CANADA FX DEBT-C$ surges to 3-yr high, concerns start to rise

Wed Apr 6, 2011 4:33pm EDT
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   * Ends at C$0.9604 to the U.S. dollar, or $1.0412.
 * Extends gains after strong Ivey PMI data
 * C$ rises in seven of last eight sessions
 * Bond prices weaker across the board
 * Two-year bond auction meets with firm demand
 (Updates to close)
 By Ka Yan Ng
 TORONTO, April 6 (Reuters) - The Canadian dollar CAD=D4
powered to a three-year high against its U.S. counterpart on
Wednesday, underpinned by firm oil prices and the appeal of the
country's overall economic health, but the latest gains drew
words of caution from analysts.
 Already rising in the overseas session, the currency got a
further shot in the arm after the Ivey Purchasing Managers
Index showed purchasing activity rose to 73.2 last month from
70.8 in February. [ID:nN06114698]
 The data added to the growing view that the Bank of Canada
will raise interest rates in the coming months, which has also
helped the currency's resiliency.
 The currency closed higher for the seventh time in the past
eight sessions, for a gain of about 1.6 percent. It finished at
C$0.9604 to the U.S. dollar, or $1.0412, up from Tuesday's
North American finish at C$0.9639 to the U.S. dollar, or
 But it closed down moderately from an earlier high of
C$0.9569 to the U.S. dollar, or $1.0450, its strongest level
since November 2007. It is still a long way from the record
high of that same month, which sits at C$0.9059 to the U.S.
dollar, or $1.1039, according to Thomson Reuters data.
 The currency's appreciation, although gradual this year,
has piqued concern among some analysts at current levels,
particularly for a country with an export-oriented economy.
 "At this point right now, if it continues to be this
strong, businesses might really start to suffer from that,"
said Mazen Issa, macro strategist at TD Securities.
 Still, Canada's high-flying dollar may have already reached
its strongest levels against the U.S. currency for the next
year, according to a Reuters poll. Median forecasts show the
currency is expected to ease throughout the coming 12 months.
[ID:nN06160269] [CAD/POLL]
 Technical chart points are vague around these levels
because the currency has not spent much time here, analysts
 "The risk for the Canadian dollar is that it moves too far,
too quickly and the central bank delays tightening as a
consequence, or attempts to talk the currency down," said
Fergal Smith, managing market strategist at Action Economics.
 He has pencilled in a rate hike call for July, but said a
more hawkish statement by the Bank of Canada at next Thursday's
Monetary Policy Report could bring forward that call.
 Yields on overnight index swaps, which trade based on
expectations for the central bank's key policy rate, have fully
priced in a rate hike by September. But odds of July have edged
up in recent sessions. BOCWATCH
 While tighter monetary policy is expected later this year,
demand was still strong for the two-year bond, the part of the
curve that is particularly sensitive to interest rate changes.
 Canada's C$3.5 billion auction of two-year bonds, due 2013,
netted solid demand. The bid-to-cover ratio was 2.6177 for the
new bond, down slightly from 2.69 in March. But Smith said the
ratio still compared favorably to the recent average.
 The ratio is a measure of investor demand and a reading
above 2 generally indicates a decent auction.
 "Yields have backed up and they're back inside of the peak
reached in February," said Smith. "The Canadian two-year yield
is trading more than 100 basis points over Treasuries."
 Overall, Canadian bond prices were softer across the curve,
with the two-year bond CA2YT=RR down 5 Canadian cents to
yield 1.889 percent, while the 10-year bond CA10YT=RR lost 31
Canadian cents to yield 3.422 percent. The bonds mostly
outperformed against their U.S. counterparts.
 (Reporting by Ka Yan Ng; editing by Rob Wilson)