January 9, 2009 / 10:26 PM / in 9 years

CANADA FX DEBT-C$ hit by bleak economic outlook, weaker oil

* Big Canada, U.S. job losses add to economic gloom

* Dismal outlook drags oil price down 2 percent

* Bonds push higher as equities retreat

By Jennifer Kwan

TORONTO, Jan 9 (Reuters) - The Canadian dollar weakened against the U.S. currency on Friday as dismal economic data from both sides of the border underscored the severity of the global downturn and helped drag down the price of crude.

The Canadian currency closed at C$1.1908 to the U.S. dollar, or 83.98 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 across the curve as the gloomy employment data drew investors to safe-haven government debt.

Data showed the Canadian economy shed 34,400 jobs in December while the unemployment rate rose to 6.6 percent. Both figures were slightly worse than forecasts in a Reuters poll for job losses of 22,000 and an unemployment rate of 6.5 percent. [ID:nN09253705]

More grim were U.S. figures that showed employers chopped payrolls by 524,000 in December, pushing the unemployment rate to its highest level in almost 16 years, adding to worries over the outlook for U.S. economy. [ID:nN09282664]

The twin reports were no big surprise to the market, but “they still offered gruesome evidence of the depth and speed of the broader economic downturn,” Doug Porter, deputy chief economist, BMO Capital Markets, said in a research note.

Despite being weaker, the Canadian dollar “held on fairly well given the numbers that came out today,” said David Watt, senior currency strategist, RBC Capital Markets.

“It sort of shows that the Canadian economy, even though it is struggling, is still doing a lot better than the U.S. economy,” said Watt.

Other factors that pressured the Canadian currency included data showing a slump in building permits and housing starts. [ID:nN09284759]

As well, the price of oil CLc1 fell 2 percent to settle at $40.83 a barrel on the glum U.S. jobs data. [ID:nSP104411]. Canada is a major oil producer and exporter and any movements in the price of crude often pressure the Canadian currency.

BONDS HIGHER

Canadian government bond prices were higher across the curve as the employment data supported expectations that the Bank of Canada will cut rates further on Jan. 20. Investors also took safer bets, which saw Toronto’s main stock index .GSPTSE close down more than 1.5 percent.

At the long end, bond bearishness due in part to an unwinding of safe-haven buying late last year and supply concerns was overcome by the sour economic mood.

“The major thing that was driving the bus here today was the employment data both north and south of the border ... they were both pretty dismal,” said Levente Mady, a fixed income strategist at MF Global Canada in Vancouver.

Mady added that the bond price rally was not as steep as one might expect given the data, suggesting the market may have been braced for even worse numbers.

The two-year bond was up 10 Canadian cents at C$103.08 to yield 1.095 percent, while the 10-year bond rose 65 Canadian cents to C$111.85 to yield 2.804 percent.

The yield spread between the two-year and 10-year bond was 171 basis points.

The 30-year bond was up 65 Canadian cents to yield 3.632 percent. In the United States, the 30-year treasury yielded 3.0470 percent. (Reporting by Jennifer Kwan; editing by Rob Wilson)

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