March 6, 2009 / 10:02 PM / in 9 years

CANADA FX DEBT-C$ edges higher, bonds drop as supply awaits

* Canadian dollar closes at 77.73 U.S. cents

* C$ gains early after U.S. jobs data, then retreats

* Bonds drop, face slew of supply next week (Updates to close)

By Ka Yan Ng

TORONTO, March 6 (Reuters) - The Canadian dollar finished slightly higher against the U.S. currency on Friday after giving up most of the early gains made after a U.S. jobs report that was not as bad as some had feared.

The Canadian dollar CAD= finished at C$1.2865 to the U.S. dollar, or 77.73 U.S. cents, up from Thursday’s close at C$1.2884 or 77.62 U.S. cents.

The currency climbed as high as C$1.2765 to the U.S. dollar, or 78.34 U.S. cents, after data showed the U.S. economy shed 651,000 jobs in February, pushing the unemployment rate to its highest level in 25 years. [ID:nN05339652].

The jobs figure was close to a drop of 648,000 in nonfarm payrolls that had been forecast by economists polled by Reuters, though some had predicted losses as high as 800,000.

The U.S. jobs data provided a promising start for equity markets, which initially headed higher in relief. But as the stocks rally fizzled, so did the climb by the Canadian dollar.

The currency has recently been strongly correlated to the Toronto stock market -- partly as a reaction to risk appetite as well as their common link to underlying commodity prices, and especially to oil, a key Canadian export.

“Global risk was better this morning, now it’s off the boil,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“It’s trading more or less tick for tick with the directional bias in equities.”

Next week, the data calendar for Canada is fairly quiet until Friday’s jobs figures for February so global events will continue to be the main drivers for the currency.

For the week, the Canadian dollar was down 1.1 percent.

BONDS DROP AS SUPPLY IN THE WINGS

Canadian bond prices were lower across the curve, underperforming their U.S. counterparts, as a wave of supply was set to hit the market next week.

Bonds initially turned lower following the U.S. jobs report, and amid the early strength in equity markets.

But when stocks turned lower, bonds didn’t push higher in the usual inverse relationship with equities. Instead they continued lower as investors worried about the prospect of markets absorbing $63 billion in U.S. government notes and bonds.

“The data really is secondary. Unless the data really deviates much from expectations its not going to have much of an impact,” said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.

“I think what will impact is the ability for the market to absorb all the new issue supply.”

Canadian bonds have had a strong week, so some position-squaring ahead of the weekend may also be taking place, he added.

The two-year bond fell 6 Canadian cents to C$103.07 to yield 0.955 percent. The 10-year bond lost 19 Canadian cents to C$107.11 to yield 2.939 percent.

The 30-year bond dropped 90 Canadian cents to C$124.45 and yielded 3.611 percent.

Editing by Rob Wilson

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