December 12, 2008 / 10:05 PM / 9 years ago

CANADA FX DEBT-C$ sinks with oil, bonds turn lower

4 Min Read

* Canadian dollar falls, underperforms on the crosses

* Auto industry in Canada and United States in focus

* Bonds flat to lower as stocks turn higher

TORONTO, Dec 12 (Reuters) - The Canadian dollar fell against the U.S. dollar on Friday, and dropped sharply versus the euro, as oil prices retreated and the survival of the North American auto industry was put in question.

Canadian bond prices were flat to lower as a rebound in stock markets erased early gains made in the bond market on shaky U.S. retail sales data.

The Canadian dollar finished at C$1.2512 to the U.S. dollar, or 79.92 U.S. cents, down from C$1.2337 to the U.S. dollar, or 81.06 U.S. cents, at Thursday's close when it shot up 2 U.S. cents.

The Canadian currency fell early in the day alongside the price of oil and trimmed losses as oil recovered a bit as the day progressed. The currency generally moves with the price of oil because Canada is a major oil exporter.

"I suppose it's the classic reversal in oil prices that's doing part of it. It looks like commodity players in general are being unfavorably viewed today," said Eric Lascelles, chief economics and rates strategist at TD Securities.

"But the U.S. dollar is hardly a bastion of strength in its own right."

The failure of a bailout package for the ailing U.S. auto industry in Congress helped push both the Canadian and U.S. dollars lower. But each made partial recoveries as the White House said it may help the auto sector by tapping into part of a $700 billion financial sector rescue package. [ID:nN12436483]

In Canada, where automakers are also looking for aid, the Canadian government said it is open to helping the ailing industry. [ID:nN12441314]

Because the auto industry woes affects both countries, Adam Cole, global head of currency strategy at RBC Capital Markets, looked at the Canadian dollar's performance against the euro..

"The fact that Canada is down versus the euro quite sharply is a better barometer of the spillover that the market sees for Canada from the U.S. problems," he said.

The Canadian dollar fell to C$1.6712 against the euro, or 59.84 euro cents, down sharply from C$1.6138, or 61.97 euro cents, at the previous session.

Bonds Flat to Lower

Canadian bond prices were flat to lower as stocks markets rebounded on hopes that the troubled auto sector would not collapse after all.

Bonds rose early in session, supported by data that showed sales at U.S. retailers dropped for the fifth straight month in November, although the drop was not as bad as expected. U.S. consumer sentiment also fell.

"The main theme for much of the day was a selloff and now we're starting to see a rally (in yields) into the end of the week," TD's Lascelles said.

Longer term, market players expect bond prices to keep rising as central banks are likely to continue to cut rates to try to stimulate their economies.

The two-year bond rose 2 Canadian cents to C$102.43 to yield 1.489 percent. The 10-year bond fell 18 Canadian cents to C$109.42 to yield 3.093 percent.

The yield spread between the two-year and 10-year bond was at 158 basis points, edging up from 157 basis points at the previous close.

The 30-year bond slipped 45 Canadian cents to C$121.50 to yield 3.763 percent. In the United States, the 30-year Treasury yielded 3.054 percent. (Reporting by Ka Yan Ng; editing by Peter Galloway)

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