January 9, 2009 / 3:26 PM / 9 years ago

CANADA FX DEBT-C$ weakens, hit by employment data

* Canada sheds 34,400 jobs in Dec vs 22,000 loss forecast

* Bonds higher at short end, lower at long end

By Jennifer Kwan

TORONTO, Jan 9 (Reuters) - The Canadian dollar edged lower versus the U.S. currency on Friday as December employment data in Canada signaled that the economy has likely slipped into recession, giving the Bank of Canada more ammunition to cut interest rates further.

At 9:46 a.m. (1446 GMT), the Canadian currency was at C$1.1910 to the U.S. dollar, or 84.03 U.S. cents, down from C$1.1785 to the U.S. dollar, or 84.85 U.S. cents, on Thursday.

Bond prices were higher at the short end as the jobs data supported expectations the Canadian central bank will cut rates further, while the long end was pressured by persistent supply concerns in both Canada and the United States.

Figures on Friday showed the Canadian economy shed 34,400 jobs in December, while the unemployment rate rose to 6.6 percent from 6.3 percent in the previous month.

The figures were worse than forecasts in a Reuters poll for job losses of 22,000 and a jobless rate of 6.5 percent. [ID:nN09253705]

Also weighing on the Canadian currency were U.S. employment figures, also released on Friday.

“I guess there is an adage here of what’s bad for the U.S. is bad for Canada,” said Michael Gregory, senior economist at BMO Capital Markets.

“Although the (U.S.) jobs numbers weren’t worse than expected, they clearly are very negative. The feeling is that’s going to spillover across to Canada, weaken the Canadian economy and cause the Bank of Canada to ease (rates) further. All of that contributes to a weaker Canadian dollar.”

U.S. government data showed U.S. employers chopped payrolls by 524,000 in December, pushing the unemployment rate to its highest level in almost 16 years. [ID:nN09282664]

But the losses were not as big as analysts had predicted, which may have supported the greenback, Gregory said.

The price of oil CLc1 was down at around $40 a barrel on the glum U.S. jobs data, which helped to pressure the Canadian currency. [ID:nSP104411] Canada is a major oil producer and exporter.

BONDS MIXED

Canadian bond prices edged higher at the front end of the curve as the employment data supported expectations that the Bank of Canada will cut rates on Jan. 20.

Bond bearishness has been a prevalent theme so far in 2009 due to worries about oversupply, which continued to pressure the long end.

“We’ve got a bit of a rally and a steepener in place today and logically that’s a consequence of the jobs figures we had out this morning, which were fairly grim for Canada,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

The two-year bond was up 5 Canadian cents at C$103.03 to yield 1.121 percent, while the 10-year bond rose 10 Canadian cents to C$111.30 to yield 2.867 percent.

The yield spread between the two-year and 10-year bond was 176 basis points, versus 177 at the previous close.

The 30-year bond was down 20 Canadian cents to yield 3.674 percent. In the United States, the 30-year Treasury yielded 3.081 percent. (Reporting by Jennifer Kwan; editing by Peter Galloway)

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