August 11, 2010 / 6:48 PM / 7 years ago

CANADA FX DEBT-C$ tumbles, bonds soar after gloomy trade data

* C$ falls to 95.58 U.S. cents, holds near session low

* Bond prices soar on flight to safety

* Canada trade deficit widens; to drag on Q2 growth (Updates to late afternoon)

By Ka Yan Ng

OTTAWA, Aug 11 (Reuters) - The Canadian dollar tumbled to its lowest level in nearly three weeks against the greenback on Wednesday, while bonds surged, as a spate of disappointing indicators, including widening North American trade deficits, left investors to reassess the world economic recovery.

Canada posted a trade deficit in June of C$1.13 billion nearly four times expectations, while the U.S. monthly trade gap widened by 19 percent to $49.9 billion, the biggest shortfall since October 2008. [ID:nN15446129] [ID:nN11208864]

“It was a double whammy of bad news for the currency,” said Sal Guatieri, senior economist at BMO Capital Markets.

“Canada’s trade report showed a considerable widening in our trade deficit, partly because of a drop in exports, and the weak U.S. trade report will fan fears of a faltering U.S. economic recovery, which will raise concerns about further weakness in Canadian exports.”

As a result, the Canadian currency, already under pressure from pessimistic outlooks from the U.S. Federal Reserve and Bank of England, as well as weak Chinese economic data, fell more than a penny after breaking a key technical level of C$1.04 early in the session, and stayed well below it.

At 2:30 p.m. (1830 GMT), the currency CAD=D4 was at C$1.0462 to the U.S. dollar, or 95.58 U.S. cents, not far from its session low of C$1.0475 to the U.S. dollar, or 95.47 U.S. cents, its weakest level since July 22.

It was off more than a penny from Tuesday’s finish at C$1.0323 to the U.S. dollar, or 96.87 U.S. cents.

David Bradley, director of foreign exchange trading at Scotia Capital, said the Canadian dollar may be “particularly vulnerable” to a slower global economy since it is sensitive to factors such as commodity prices and may also track equity markets, which may extend declines.

He said a close beyond C$1.0410 to the U.S. dollar could set up a test of C$1.0725 to C$1.0750. These levels have not been seen since late May.

BONDS PRICES TAKE FLIGHT

Canadian bond prices extended their gains, as the dramatically higher trade deficit figures lent more support to lower-risk government debt.

The interest-rate sensitive short-dated issues saw their prices shoot higher as market players reassessed the global economy on the back of a string of soft data and a gloomier outlook from the Fed on Tuesday.

“We’re seeing a flight to quality today because of the rotation out of risky assets and a reappraisal of the Bank of Canada’s tightening trajectory,” said Fergal Smith, managing market strategist at Action Economics.

Yields on overnight index swaps tumbled to around 50 percent from around 58 percent before the day’s data, reflecting the market’s view that the chances of a quarter-point rate hike in September are now less likely. BOCWATCH

The two-year bond CA2YT=RR jumped 18 Canadian cents to yield 1.352 percent, while the 10-year bond CA10YT=RR added 52 Canadian cents to yield 2.972 percent.

An auction of two-year government of Canada bonds attracted decent demand, producing a bid-to-cover ratio of 2.523 that was close to the recent average. [ID:nN11232264] [CA/AUC] (Additional reporting by Claire Sibonney; editing by Rob Wilson)

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