April 10, 2008 / 2:20 PM / 9 years ago

Dollar drops despite surge in trade surplus

TORONTO (Reuters) - The Canadian dollar gave back early gains and slipped versus the U.S. dollar on Thursday morning despite surprisingly upbeat economic data that may have reduced near-term fears for the economy.

Bond prices handed back the bulk of earlier gains and were mixed across the curve as the Canadian data clashed with concerns of a possible recession in the United States.

At 10:00 a.m., the Canadian unit was at C$1.0210 to the U.S. dollar, or 97.94 U.S. cents, down from C$1.0190 to the U.S. dollar, or 98.14 U.S. cents, at Wednesday’s close.

Data released earlier in the session showed Canada’s trade surplus jumped by 78 percent, and the gain was entirely in trade with the United States.

But the upbeat data, a relatively weak U.S. dollar, and higher commodity prices were not enough to spark interest in the Canadian dollar and help it reclaim any of the losses suffered in the previous four sessions.

“Obviously there is not a lot of appetite for the Canadian dollar and it looks like basically Canada is being lumped in with the U.S., and as investors are selling the U.S. they are also staying away from Canada,” said Doug Porter, deputy chief economist at BMO Capital Markets.

Slow economic growth has spawned fears of a recession in the United States and that has hampered the Canadian dollar’s performance since the Canadian economy relies on the United States as a market for the bulk of its exports.

Movements in the Canadian dollar may also be muted ahead of Bank of Canada Deputy Governor David Longworth’s speech, called “Credit Markets, Financial Stability, and Monetary Policy,” at 1 p.m. in Lake Louise, Alberta.

Longworth’s speech will be the last public appearance by a Bank of Canada official ahead of the bank’s next interest rate announcement, on April 22.

BONDS MIXED

Canadian bond prices handed back much of their earlier gains and were mixed across the curve, with the bulk of the decline following the Canadian trade data, which helped cool some of the worst near-term fears for the economy.

Also playing a key role in the retreat in bond prices was U.S. data that showed the number of workers applying for unemployment benefits tumbled in the latest week.

“We saw strength in bond markets even before the data, but since that time there has been a little bit of a retreat, if anything, because the claims were actually a little lower than expected,” Porter said.

The overnight Canadian Libor rate was 3.4500 percent, up from 3.4000 percent on Wednesday.

Wednesday’s CORRA rate was 3.4699 percent, up from 3.4542 percent on Tuesday. The Bank of Canada publishes the previous day’s rate around 9 a.m. daily.

The two-year bond was up 1 Canadian cent at C$102.18 to yield 2.690 percent. The 10-year bond was down 9 Canadian cents at C$103.31 to yield 3.570 percent.

The yield spread between the two- and 10-year bonds was 88.0 basis points, up from 86.2 basis points at the previous close.

The 30-year bond slipped 23 Canadian cents to C$115.87 to yield 4.065 percent. In the United States, the 30-year treasury yielded 4.319 percent.

The three-month when-issued T-bill yielded 2.33 percent, up from 2.31 percent at the previous close.

Editing by Peter Galloway

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