CANADA FX DEBT-Skidding commodites pull Canadian dollar down

Wed May 11, 2011 4:33pm EDT
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   * C$ ends down at C$0.9611 to U.S. dollar, or $1.0405
 * Tumbling oil, equities weigh on currency
 * Canada's trade surplus grows more than expected
 * Bonds rally, but underperform U.S. Treasuries
 * Two-year auction solid, averages 1.873 pct
 (Updates to close, adds details, analyst comments)
 By Claire Sibonney
 TORONTO, May 11 (Reuters) - Canada's commodity-driven
dollar retreated against the U.S. currency on Wednesday,
triggered by a selloff in oil and other commodities, reminding
jittery investors of last week's shocking collapse.
 A stronger greenback and ample U.S. fuel supplies dragged
crude oil and gasoline prices down sharply, sending North
American stock markets on a steep slide.  [O'ER] [.N] [.TO]
 Other commodity prices tumbled as well, notably silver,
which fell more than 7 percent. [GOL/].
 Part of the broad risk-off theme was attributed to soft
Chinese inflation data, which suggested the world's second
largest economy might be cooling. [ID:nL3E7GB0H2]
 "I think it highlights how nervous the market is," said
Camilla Sutton, chief currency strategist at Scotia Capital,
noting the fears that played out last week re-emerging.
 Investors are worried about sluggish growth in emerging
markets leading a global growth slowdown, she said.
 "Part of it is just a very, very skittish market."
 The Canadian dollar CAD=D4 ended the North American
session at C$0.9611 to the U.S. dollar, or $1.0405, down from
Tuesday's North American close of C$0.9577 to the U.S. dollar,
or $1.0442.
 There was a reversal in investor sentiment from earlier in
the day, when the currency rallied on the back of rising
overseas equities, better-than-expected domestic trade data and
talk of positive flows on the back of foreign acquisitions of
Canadian companies and interest from Asian central banks.
 Canada's trade surplus bounced higher in March after two
months of declines as broad increases in exports outstripped
higher imports. [ID:nN11188678]
 "You're dealing with a potential risk-off tone right now
unfortunately and the Canadian dollar gets caught in the
crossfire, as do commodities and equities," said David Tulk,
chief Canada macro strategist at TD Securities.
 "We're one step forward, two steps back," Tulk added.
 Scotia Capital's Sutton said that Wednesday's low around
C$0.9640 would act as near-term support for the currency. She
pointed out it was outperforming on some of the crosses,
substantially against the euro, which remained under pressure
from renewed concerns about Greece's debt. [FRX/]
 Canadian government bond prices rallied across the curve,
tracking U.S. Treasury prices as the market moved into
risk-aversion mode.
 "The Canadian curve is generally moving in sympathy," said
Tulk, noting however that Canadian bond prices were
underperforming their U.S. counterparts given the better than
expected domestic trade data.
 The two-year bond CA2YT=RR climbed 4 Canadian cents to
yield 1.703 percent, while the 10-year bond CA10YT=RR jumped
36 Canadian cents to yield 3.224 percent.
 Canada's sale of two-year government bonds met with healthy
appetite, helped by persistent worries about global growth,
euro zone debt woes and Canada's relatively strong
fundamentals. [ID:nTZOBGE70U]
 The C$3.5 billion auction produced an average yield of
1.873 percent and a bid-to-cover ration of 2.52.
 The ratio is a measure of investor demand and a reading
above 2 typically indicates a decent auction.
 (Editing by Rob Wilson)