CANADA FX DEBT-C$ ends higher, looks vulnerable to oil trade

Tue Mar 8, 2011 4:55pm EST
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   * C$ makes moderate gains to $1.0294
 * Oil key short-term factor in C$ movements
 * Bond prices mirror U.S. Treasuries
 (Updates to close)
 By Ka Yan Ng
 TORONTO, March 8 (Reuters) - The Canadian dollar edged up
to a higher close against the U.S. currency on Tuesday as oil
prices trimmed losses suffered after Kuwait's oil minister said
OPEC was considering boosting production for the first time in
more than two years. [O/R]
 The commodity-linked Canadian dollar -- which often reacts
to oil prices because of the country's large oil exports --
rose to C$0.9707 to the U.S. dollar, or $1.0302, up slightly
from its overnight high of C$0.9711. It remained locked in the
broad range between C$0.97 and C$0.98 that it has been in for
more than a week.
 "There's not really any clear evidence for it to break
C$0.97, but you also have one of the major economic reports for
Canada that's going to be coming out later this week," said
David Watt, senior currency strategist at RBC Capital Markets.
 "I think today is position- and range trading as opposed to
anything fundamental going on."
 The Canadian dollar finished at C$0.9714 to the U.S.
dollar, or $1.0294, up from C$0.9729 to the U.S. dollar, or
$1.0279, at Monday's close.
 While near-term market focus remains on the price of oil
and developments in Libya, several high-profile pieces of
Canadian data are still to come and may help determine the
timing of Canadian interest rate hikes.
 Market players will be searching for evidence that the
Canadian economy recovery has momentum when they look at the
January trade and February jobs figures that are due on
Thursday and Friday, respectively.
 The currency could be ripe for a steep fall if crude prices
slide from the 2-1/2 year highs that have been fueled by unrest
in Libya and oil disruption worries.
 Michael O'Neill, managing director at Knightsbridge Foreign
Exchange, said that if oil retreats to below $100 a barrel, the
Canadian dollar would probably follow suit and tumble towards
C$0.9850, a level not seen in more than a week.
 "If oil prices retreat a bit further, the extremely short
U.S. dollar/Canada dollar positions are going to get unwound.
It's vulnerable for a correction," he said.
 "I think everything that made Canada strong is priced in.
All the good news is in the current level, maybe more. I think
the market has gotten ahead of themselves."
 Canadian government bonds prices fell across the curve on
Tuesday, mirroring U.S. Treasuries, which absorbed one tranche
of the $66 billion in new U.S. supply set to come out this
 There was solid demand in the sale of $32 billion in
three-year Treasury notes.
 Bonds were also undermined by a rise in U.S. stocks and a
falling oil price. [US/]
 "Canada is piggybacking on the U.S.," said David Tulk,
chief Canada macro strategist at TD Securities. "The U.S. is
being driven by risk assets that manage to overcome the hurdle
of more sovereign weakness in Europe."
 The sovereign debt problems of some euro-zone nations have
crept back into headlines after two agencies recently slashed
their ratings on the debt of Greece and Spain, though North
American bonds have not caught a safe-haven bid.
 The two-year bond CA2YT=RR was down 5 Canadian cents to
yield 1.882 percent, while the 10-year bond CA10YT=RR fell 34
Canadian cents to yield 3.397 percent. Canadian bonds
underperformed their U.S. counterparts across the curve, except
in the three-year issue.
 Canada will auction C$3 billion of two-year notes on
 (Reporting by Ka Yan Ng; editing by Peter Galloway)