January 8, 2008 / 10:37 PM / in 10 years

Canadian dollar rises with commodities, bonds up

TORONTO (Reuters) - Lofty oil and gold prices helped the commodity-linked Canadian dollar rise against the U.S. dollar on Tuesday, but a lack of Canadian economic data limited gains.

Canadian bond prices rallied on a safe haven bid as North American equity markets turned negative.

The Canadian dollar ended the North American session at 99.56 U.S. cents, valuing a U.S. dollar at C$1.0044, up from 99.44 U.S. cents, or C$1.0056, at Monday's close.

The currency passed the parity mark with the U.S. dollar shortly before midday, rising to a high of US$1.0034, making a U.S. dollar worth 99.66 Canadian cents. But it was unable to maintain the momentum as oil prices slid back from session highs.

U.S. crude oil CLc1 closed up more than 1 percent, at above $96 a barrel on fears of violence in Nigeria and speculation of declining U.S. crude stocks. Meanwhile, spot gold XAU= hit a record high above $880 an ounce, supported by a weaker greenback and higher oil prices.

Canada is a major producer and exporter of both oil and gold, and its currency has followed their price increases higher over the past few years.

But as fears of a recession in the United States grow, the foreign exchange market is waiting for more economic data to dictate direction, said David Watt, senior currency strategist at RBC Capital Markets.

"People are just waiting around for fresh data to give it direction, and until then, we are just going to continue to go on a day-to-day basis with no clear direction in currencies."

The main piece of domestic data for the week comes on Friday, with December's employment report.

"A weak jobs number could set the stage for a sentiment change for the Canadian dollar, which hasn't really filtered into the market yet, especially with oil continuing to hover around $100 a barrel," Davis said.

RBC is forecasting the Canadian dollar to fall to around 90-91 U.S. cents by the end of 2008.

BONDS RALLY

Canadian bond prices staged a late-session rally along with U.S. Treasuries as investors looked for more secure assets in response to falling North American equities markets.

The Toronto Stock Exchange ended down nearly 80 points, and the Dow Jones Industrial Average plunged nearly 240 points on growing fears of a U.S. recession.

"The bond market in the U.S. is telling anyone that's willing to listen that the risk of a recession is extremely high and maybe the stock market guys are cluing in on that," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.

The growing U.S. economic concerns have market players betting that the U.S. Federal Reserve could cut interest rates by as much as half a percentage point at its January 29-30 meeting. The Bank of Canada is expected to announce a 25 basis point cut to its overnight rate on January 22.

The two-year bond rose 12 Canadian cents to C$101.40 to yield 3.476 percent. The 10-year bond climbed 21 Canadian cents to C$101.18 to yield 3.849 percent.

The yield spread between the two-year and 10-year bond was 37.3 basis points, up from 33.3 at the previous close.

The 30-year bond rose 12 Canadian cents to C$116.43 to yield 4.040 percent. In the United States, the 30-year treasury yielded 4.312 percent.

The three-month when-issued T-bill yielded 3.77 percent, unchanged from the previous close.

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