January 6, 2009 / 3:31 PM / 9 years ago

CANADA FX DEBT-C$ strengthens as oil rises above $50

*Canadian dollar at highest level since November

*Bond prices lower as stock markets rally

By Jennifer Kwan

TORONTO, Jan 6 (Reuters) - The Canadian dollar edged higher against the U.S. currency on Tuesday morning as oil rose above $50 a barrel on supply concerns resulting from the Israel-Gaza war and a dispute between Russia and Ukraine over natural gas.

Bonds were lower across the curve as expectations of new debt supply dulled the attraction of government bonds and investors continued to flock to equities, with Toronto’s main stock index .GSPTSE led higher by its heavily weighted energy sector.

At 9:50 a.m. (1450 GMT), the Canadian dollar was at C$1.1804 to the U.S. dollar, or 84.72 U.S. cents, up from Monday’s close at C$1.1900 to the U.S. dollar, or 84.03 U.S. cents.

The currency got support from oil CLc1, a major Canadian export, which rose above $50 a barrel as Israel’s ground and air assault on Gaza heightened Middle East tensions and a dispute over natural gas between Russia and Ukraine fanned supply fears. [ID:nSIN367919]

“The biggest factor is the oil play and commodity prices generally,” said Craig Wright, chief economist at Royal Bank of Canada.

“We may be seeing a bit of revision to some of the gloom out there in terms of the outlook for global growth and with that commodity prices going forward, but I think what we’re seeing in the near term is more of an oil price play than anything else.”

The currency has been largely range-bound in recent weeks, after falling more than 18 percent in 2008, pulled lower by tumbling commodity prices in the second half of the year.

BONDS LOWER

Canadian government bond prices continued to fall, tracking the big U.S. Treasury market, which saw longer bonds drop on expectations of swelling supply.

As well, optimism that President-elect Barack Obama’s plans for fiscal stimulus will eventually jolt the U.S. economy spurred capital to flow to stock markets. [ID:nN06326812]

“There’s a tug-of-war going on in the market right now between supply versus the worries about recession ...,” said Michael Gregory, senior economist, BMO Capital Markets.

In Canada, industrial producer prices and raw materials prices both logged record monthly drops, but was largely shrugged off by the bond market, Gregory said.

The two-year bond fell 5 Canadian cents to C$102.94 to yield 1.777 percent, while the 10-year bond dropped 10 Canadian cents to C$111.00 to yield 2.903 percent.

The yield spread between the two-year and 10-year bond was 172 basis points, versus 150 at the previous close.

The 30-year bond fell 75 Canadian cents to yield 3.679 percent. In the United States, the 30-year treasury yielded 3.1260 percent. (Reporting by Jennifer Kwan; editing by Peter Galloway)

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