* Canadian dollar supported by oil, risk aversion fades
* Bonds mixed, reflecting stocks rally, rate-cut hopes
* Focus on Tuesday’s Bank of Canada rate decision
By Ka Yan Ng
TORONTO, Dec 8 (Reuters) - The Canadian dollar finished more than 1 U.S. cent higher on Monday, supported by a rebound in the price of oil and as risk aversion cooled.
Canadian bond prices were mixed as stock markets rallied and as market players toyed with the possibility that the Bank of Canada will deliver a bigger rate cut than forecast.
The currency finished the North American session at C$1.2540 to the U.S. dollar, or 79.74 69 U.S. cents, up from C$1.2709 to the U.S. dollar, or 78.68 U.S. cents, at Friday’s close.
Risk aversion, which has seen the U.S. dollar rise recently on safe haven interest, dimmed as talk of an imminent bailout deal for the Big Three U.S. automakers, and other government stimulus measures, boosted global equity markets.
“The market is certainly buoyed by what I‘m going to call hope right now. You haven’t got anything concrete yet but the market sees some reason for optimism,” said Shane Enright, currency strategist at CIBC World Markets.
Over the weekend, U.S. President-elect Barack Obama unveiled an economic recovery plan that analysts said could cost at least $500 billion, include the creation of 2.5 million jobs by 2011, and launch of the largest U.S. infrastructure investment since the 1950s.
Meanwhile, the price of oil rose more 7 percent to nearly $44 a barrel as the U.S. dollar fell and hopes of economic stimulus boosted sentiment. The Canadian dollar often tracks crude prices closely due to Canada’s big oil exports.
The Bank of Canada rate decision due Tuesday is also in focus. The central bank is expected to slash its key overnight lending rate by at least 50 basis points to deal with the softening economy, a Reuters poll found. [ID:nN05295443]
“The market is waiting in anticipation for the announcement tomorrow,” Enright said. “I think 50 is a given.”
But there is talk that the Bank of Canada will chop rates by a more aggressive 75 points, but it is not quite priced in, he said. The bank’s overnight rate is currently at 2.25 percent.
Bonds were mixed, reflecting a rally in stock markets and the possibility of a bigger than expected rate cut from the Bank of Canada.
The short-end of the market dipped as stock markets soared on proposed stimulus measures, while there was a small rise in the long end as a deteriorating economy may trigger a big rate cut.
“There’s a growing likelihood that the Bank of Canada cut tomorrow might be a bit more aggressive than the 50 (basis points) that’s already priced into the market,” said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.
Canada got more proof of a deteriorating economy with the November data for housing starts. New home construction fell a bigger than expected 18.8 percent in November to the lowest annual rate in seven years. [ID:nN08501278]
The two-year bond eased 4 Canadian cents to C$102.24 to yield 1.594 percent. The 10-year bond gained 6 Canadian cents to C$109.46 to yield 3.090 percent.
The yield spread between the two-year and 10-year bond was at 151 basis points, up from 152 basis points at the previous close.
The 30-year bond was flat at C$121.30 to yield 3.773 percent. In the United States, the 30-year treasury yielded 3.150 percent. (Reporting by Ka Yan Ng; editing by Rob Wilson)