CANADA FX DEBT-C$ hits 1-week low as oil drops on Suez calm

Tue Feb 8, 2011 4:29pm EST
 
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 * C$ ends session at C$0.9946 vs greenback, or $1.0054
 * Bond prices track U.S. Treasuries lower
 (Updates to close, adds details, quotes)
 By Claire Sibonney
 TORONTO, Feb 8 (Reuters) - Canada's currency slid to a
one-week low against the U.S. dollar on Tuesday as oil prices
were undermined by news that Suez Canal operations were
unaffected by strikes, calming concerns about Mideast
supplies.
 China's move to raise interest rates for the second time in
just over a month to tame inflation was already pressuring U.S.
crude futures early in the day even as markets were keeping a
close watch on events in Egypt. [O/R]
 By afternoon, the currency CAD=D4 had slid nearly a penny
from the day's overnight high to as low as C$0.9978 versus the
greenback, or $1.0022, its weakest level since Feb. 1.
 "The Canadian dollar, whether we like it or not, is thought
of as a petro currency," said Carlos Leitao, chief economist at
Laurentian Bank of Canada.
 "I think the oil price change is more a return to reality,"
he said, noting that prices last week appreciated too fast due
to fears that the Suez Canal could be shut down.
 U.S. crude oil futures ended 0.6 percent lower at $86.94 a
barrel on Tuesday, the lowest close since Jan. 27.
 C.J. Gavsie, managing director of foreign exchange sales at
BMO Capital Markets, said that if U.S. oil prices retreat to
the low $80s to high $70s range, the Canadian dollar could
weaken by another couple of cents, sliding back below parity
with its U.S. counterpart.
 The Canadian dollar CAD=D4 closed the North American
session at C$0.9946 to the U.S. dollar, or $1.0054, down from
Monday's North American close of C$0.9902, or $1.0099.
 Not helping the currency, figures on Tuesday showed
Canadian housing starts rose only a modest 0.8 percent in
January.
 The data showed that strength in rural areas offset dips in
urban markets, suggesting the once buoyant housing sector may
continue to weigh on economic growth. [ID:nN08273018]
 Canadian government bond prices were softer across the
curve, following a bigger move in U.S. Treasuries, which
extended losses after investors demanded to be paid higher
yields in a $32 billion sale of new three-year notes. [US/]
 The two-year bond CA2YT=RR fell 9 Canadian cents to yield
1.878 percent, while the 10-year bond CA10YT=RR dropped 42
Canadian cents to yield 3.487 percent.
 "Bond markets are still trying to come to grips with
whether the commodity price inflation that we've seen ... is
going to translate into a sustained increase in inflation in
the North American and the European markets," said Laurentian's
Leitao.
 "I don't think it is, so I would expect yields to come back
down again at some point in the near term, but until and unless
markets get a bit more comfortable with the inflation outlook,
I think yields will be under upward pressure."
 (Reporting by Claire Sibonney; editing by Peter Galloway)