March 11, 2008 / 2:34 PM / 9 years ago

Canadian dollar gets boost from liquidity measures

4 Min Read

TORONTO (Reuters) - The Canadian dollar pushed higher against a stronger U.S. dollar on Tuesday, as stock markets, which are being looked to as a barometer for the health of the U.S. economy, rallied on the back of a coordinated move by central banks to help ease liquidity strains.

Domestic bond prices fell across the curve after the Bank of Canada joined the U.S. Federal Reserve and other central banks, in the liquidity boosting measures.

The Canadian currency closed at US$1.0067, valuing a U.S. dollar at 99.33 Canadian cents, up from US$1.0033, or 99.67 Canadian cents, at Monday's close.

For its part in the coordinated central bank operations, the Bank of Canada said it would lend up to C$4 billion to market players via 28-day term purchase and resale agreements.

The move was dwarfed by the Fed's announcement south of the border, where up to $200 billion of Treasury securities for 28 days were put on the table.

A spokesman for the Bank of Canada noted this country has experienced a much lesser degree of liquidity pressures.

The Bank of England, the European Central Bank and the Swiss National Bank also participated in the operations.

Investors cheered the moves, which eased concerns about a deepening credit crisis and a possible U.S. recession.

The Toronto Stock Exchange rallied to close 2.6 percent higher and the Dow Jones Industrial Average vaulted 3.6 percent on the measures.

At midday, equities fell off their earlier highs, and the Canadian dollar weakened, but the softness was short-lived as stocks rallied again, lifting the Canadian dollar higher.

"Today the Canadian dollar was very much trading lock-step with the equity markets," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

Healthy equities markets are being seen as a sort of proxy for the health of the U.S. economy, which takes in far-and-away the biggest proportion of Canada's exports.

The U.S. dollar was also a winner on the day, rising sharply against the yen and the Swiss franc, and less so against the euro.

But the greenback was unable to find enough USD/CAD buyers to gain ground on the Canadian dollar, due in part to the latest Canadian data, which showed that Canada's trade surplus widened to C$3.26 billion in January on a surge in exports.

Another report showed that new housing prices in Canada rose 0.6 percent in January, versus expectations for a 0.3 percent rise.

Bonds Unwind

Domestic bonds lost their safe haven appeal due to the coordinated central bank moves, and prices unwound some of their recent gains as equities rallied.

Canadian bonds saw less movement than U.S. Treasuries, largely because of bigger U.S. liquidity measures, which could have an impact on that country's monetary policies, said Eric Lascelles, chief economics and rates strategist at TD Securities.

"I don't think it really changes the monetary policy outlook for Canada, but I think it does change it a little bit in the U.S."

"The Fed is at risk of running out of ammunition if it keeps on cutting at 75 basis points a time."

The Fed meets next week, and short-term interest rate futures are pricing in a 62 percent chance that the Fed cuts its key lending rate by 75 basis points, whereas it had been at 100 percent on Monday.

In Canada, the two-year bond was down 23 Canadian cents at C$102.62 to yield 2.675 percent. The 10-year bond dropped 51 Canadian cents to C$103.24 to yield 3.583 percent.

The yield spread between the two- and 10-year bond was 90.7 basis points, down from 97.2 points at the previous close.

The 30-year bond declined 46 Canadian cents to C$115.94 to yield 4.063 percent. In the United States, the 30-year Treasury yielded 4.509 percent.

The three-month when-issued T-bill yielded 2.35 percent, down from 2.40 percent at the previous close.

Editing by Renato Andrade

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