May 8, 2008 / 8:49 PM / 9 years ago

Canadian dollar drops after housing data, bonds up

TORONTO (Reuters) - The Canadian dollar dropped against the U.S. dollar on Thursday after data showed Canadian housing starts fell 12 percent in April, and market players were reluctant to take big positions ahead of a key employment report due on Friday.

Canadian bond prices rose in tandem with a lift in the U.S. Treasuries market.

The Canadian currency closed at C$1.0171 to the U.S. dollar, or 98.32 U.S. cents, down from C$1.0070 to the U.S. dollar, or 99.30 U.S. cents, at Wednesday's close.

Data from the Canada Mortgage and Housing Corp. showed that construction of new homes slowed more than expected in April, and the previous month's number was also revised lower.

The annualized rate of housing starts in Canada was 213,900 units in April on a seasonally adjusted basis, versus estimates for 225,5000 units. The March figure was cut to 243,000 units from the 254,700 units first reported.

Economists noted that the slowdown in housing starts followed sharp gains early in the year, and does not indicate that the Canadian housing market is falling apart.

"Even with the decline, the level of starts is still fairly robust," Merrill Lynch Canada economist David Wolf said in a research note.

The commodity-linked Canadian dollar is normally buoyed by high oil prices, which hit a record high above $124 a barrel on Thursday. But the impact of oil prices on the currency has waned in recent days, as concerns grow that high crude prices could crimp global economic growth.

"It was disappointing the way the Canadian dollar has continued to grind lower in the face of higher oil prices today," said Steve Butler, director of foreign exchange at Scotia Capital.

"Nobody wanted to hold on to it ahead of the numbers tomorrow," he said, referring to the April jobs report.

"It certainly looks like there's been some pretty steady U.S. dollar buying going through the last two days, that's really taken us off that parity level that we just briefly touched (on Tuesday)," Butler said.

"We're right back in the middle of the range."

The April jobs report, due for release at 7 a.m. (1100 GMT) on Friday, is expected to show the Canadian economy added just 10,000 jobs last month, well below the average gains of 35,000 created each month in the first quarter.

However, the jobs data have tended to surprise market participants on the strong side, and Butler said there's a "good chance" that may happen again.

BONDS RISE

Canadian bond prices rose slightly across the yield curve, following the direction of the U.S. bond market, as dealers avoided big commitments until additional data releases signal where the economy is headed.

The two-year bond was up 7 Canadian cents at C$101.96 to yield 2.762 percent. The 10-year rose 23 Canadian cents to C$102.75 to yield 3.640 percent.

The yield spread between the two- and 10-year bonds was 87.8 basis points, up from 86.8 at the previous close.

The 30-year bond added 40 Canadian cents to C$114.50, for a yield of 4.139 percent. In the United States, the 30-year Treasury yielded 4.541 percent.

The three-month when-issued T-bill yielded 2.60 percent, unchanged from the previous close.

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