February 12, 2009 / 9:57 PM / in 9 years

CANADA FX DEBT-C$ edges lower on economic worries

* C$ falls to 80.33 U.S. cents

* Touches three-week low before rebounding

* Return of risk aversion blamed for slide

* Bonds rally on safe-haven status

By Frank Pingue

TORONTO, Feb 12 (Reuters) - The Canadian dollar closed slightly lower against the U.S. dollar on Thursday, briefly touching a three-week low as concerns about the global economy curbed risk appetite and sent investors to low-yielding currencies like the greenback.

The aversion to risk also weighed on North American equities for much of the session and offered a boost to prices for Canadian bonds, which are also considered a safe-haven investment.

“The Canadian dollar sold off as risk aversion returned to the market,” said Matthew Strauss, senior currency strategist at RBC Capital Markets. “Also weighing on the Canadian dollar was the increased weakness in the oil market.”

Jittery investors remain skeptical that U.S. government efforts will be enough to stimulate the economy and rescue a struggling financial sector.

Earlier this week U.S. lawmakers reached a deal for $789 billion in emergency spending and tax cuts aimed at pulling the economy out of recession. Also, a bank rescue plan unveiled Tuesday was not considered to be enough to shore up the U.S. financial sector.

The Canadian dollar closed at C$1.2448 to the U.S. dollar, or 80.33 U.S. cents, down from C$1.2428 to the U.S. dollar, or 80.46 U.S. cents, at Wednesday’s close.

Earlier in the session, the currency dropped to C$1.2550 to the U.S. dollar, or 79.68 U.S. cents, which marked its lowest level since Jan. 23.

Other high-yielding currencies such as the Australian and New Zealand dollars joined the Canadian unit in falling against the greenback. The low-yielding U.S. dollar is typically considered a safe-haven currency, so when stocks drop and the risk barometer climbs, investors often repatriate funds and close out risky trades funded by U.S. dollars.

With Canada a major exporter of oil, lower crude prices also helped keep Canadian dollar pinned lower. And, while currency experts agree the link between oil prices and the currency has diminished, it can still influence sentiment.

While closing lower, the currency has held up well given the recent string of weak domestic data. On Wednesday, a report showed Canada had its first monthly trade deficit in almost 33 years while data last week showed Canada had its worst monthly job losses in more than three decades in January.

BOND PRICES HIGHER

Canadian bond prices all ended higher as investors fled riskier assets like stocks in favor of more secure government debt amid the uncertain economic outlook.

But North American stocks cut early losses and managed to close comfortably off their session lows, after getting a late boost from news that Washington was hammering out a plan to subsidize mortgage payments for troubled U.S. homeowners. [ID:nN12472591]

The Toronto Stock Exchange’s main index closed up 0.47 percent, while the Dow Jones industrial average was virtually flat, ending down 0.09 percent.

The rebound in equities forced bond prices to pare some of their earlier gains, but they still managed to end the session higher across the curve.

“It’s mostly to do with the lack of (details) by the Obama administration ... and that’s caused a swing in the risk pendulum,” said Sheldon Dong, a fixed income analyst at TD Waterhouse Private Investment.

“And I think the fear is that nothing will be put in place for months, which is like an eternity for financial markets.”

The interest-rate sensitive two-year bond rose 2 Canadian cent to C$102.82 to yield 1.153 percent, while the 10-year bond rose 37 Canadian cents to C$110.92 to yield 2.900 percent.

The 30-year bond rallied 85 Canadian cents to C$123.75 to yield 3.647 percent.

Canadian bonds outperformed U.S. Treasuries across much of the curve. The Canadian 30-year bond yield was about 12.5 basis points above its U.S. counterpart, compared with 23.6 basis points on Wednesday. (Editing by Rob Wilson)

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