Canada dollar rallies after Bank of Canada survey

Mon Jul 7, 2008 4:36pm EDT
 
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 * Canadian dollar adds to last week's 0.9 percent gain
 * Bank of Canada Business Outlook Survey sparks rally
 * Canada's May building permits rise unexpectedly
 By Frank Pingue
 TORONTO, July 7 (Reuters) - The Canadian dollar rebounded
to finish higher versus the U.S. dollar on Monday after the
Bank of Canada Business Outlook Survey seemed to point to
increased inflationary risks and spurred talk of interest rate
hikes.
 Canadian bond prices ended higher across the curve as stock
markets fell, sparking demand for government debt.
 The Canadian dollar closed at C$1.0189 to the U.S. dollar,
or 98.15 U.S. cents, up from C$1.0200 to the U.S. dollar, or
98.04 U.S. cents, at Friday's close.
 The Bank of Canada Business Outlook Survey sparked a rally
in the currency and lifted it from its session low as the
market took its findings to signal that the central bank would
become more hawkish.
 In the survey, the Bank of Canada said businesses surveyed
in the second quarter were relatively upbeat on their sales
outlooks and investment plans compared with the first quarter,
even though the economy remained sluggish.
 "This was as strong a piece of economic data and as big a
surprise as you're ever going to get," said Eric Lascelles,
chief economics and rates strategist at TD Securities.
 "It's really one of those reports that surprised on several
fronts, all in the same direction and all supporting the notion
that the Bank of Canada needs to be more hawkish."
 The report sent an immediate bid into the Canadian dollar,
which shot to C$1.0150 to the U.S. dollar, or 98.52 U.S. cents,
moments after it was released. That allowed it to erase losses
suffered earlier when a strong U.S. dollar forced the Canadian
currency down to C$1.0232 to the U.S. dollar, or 97.73 U.S.
cents.
 Weakness in the Canadian dollar during the early parts of
the session was pegged to weaker commodity prices, which helped
send the U.S. dollar higher against a slew of currencies.
 But the move in the Canadian dollar was still limited as
traders have their sights set on the key report of the week -
Canadian jobs data for June - which will be released on
Friday.
 The June jobs figures, the last data the Bank of Canada
will consider ahead of its next scheduled interest rate
decision on July 15, are expected to show the economy created
10,000 jobs in June with an unemployment rate of 6.1 percent.
 BOND PRICES REBOUND
 Canadian bond prices rebounded from an early-session slide
as a sharp drop in shares of mortgage company Freddie Mac
unsettled investors, while concerns about the upcoming
quarterly corporate earning season also played a role.
 The slide in Freddie Mac's shares followed projections by
Lehman Brothers Inc analysts that it needs to boost capital by
$29 billion due to accounting rule changes.
 The Toronto Stock Exchange's main index dove nearly 300
points as falling gold and oil prices rattled resource shares,
while concerns about corporate earnings chimed in.
 "There's a pessimistic tone injected into the market and
that's driving the bond market and it's superseded the Business
Outlook Survey," Lascelles said.
 A report on Monday showed the value of building permits
rose 1.1 percent in Canada in May from April, compared with
expectations for a 6 percent drop, but it did not have any
noticeable impact on bond prices.
 A Conference Board of Canada survey showed Canadian
consumer confidence slumped to its lowest level in nearly 13
years in June due to the surge in gasoline prices and concern
about future economic conditions.
 The two-year bond rose 3 Canadian cents to C$101.07 to
yield 3.162 percent. The 10-year bond increased 21 Canadian
cents to C$102.39 to yield 3.682 percent.
 The yield spread between the two-year and 10-year bond was
52.0 basis points, up from 53.1 at the previous close.
 The 30-year bond rose 25 Canadian cents to C$116.20 for a
yield of 4.044 percent. In the United States, the 30-year
Treasury yielded 4.495 percent.
 The three-month when-issued T-bill yielded 2.49 percent,
unchanged from the previous close.
 (Editing by Peter Galloway)