December 12, 2007 / 9:59 PM / 10 years ago

Canada dollar rides liquidity plan to higher close

TORONTO (Reuters) - The Canadian dollar rose versus the U.S. currency on Wednesday despite a turnaround in equity markets that ate away at early gains made after a coordinated move by major central banks to help resolve liquidity issues.

Canadian bond prices ended lower across the curve due to a combination of the central bank actions and Canadian trade data that came in ahead of expectations.

The Canadian dollar closed at 98.70 U.S. cents, valuing a U.S. dollar at C$1.0132, up from Tuesday’s session close of 98.58 U.S. cents, or C$1.0144.

A sharp turnaround in North American equity markets, which stumbled after posting big gains early in the session, took its toll on the Canadian dollar and yanked it from a session high of 99.45 U.S. cents, or C$1.0055.

Support for the Canadian currency came early in the session as major central banks, including the Bank of Canada, came together to ease the tight conditions in the money market.

“The short-term implications of the establishment of the liquidity facility were positive for the commodity currencies ... including the Canadian dollar,” said David Powell, currency analyst at IDEAglobal in New York.

“But equities have taken a U-turn and ... that has seen the Canadian dollar and the rest of the commodity currencies give back those gains.”

Both the Toronto Stock Exchange and Dow Jones industrial average rallied more than 200 points during the session before closing with gains of 85.67 points and 41.13 points respectively.

For its part, the Bank of Canada said it would expand its list of securities eligible as collateral to provide liquidity to the markets and will include U.S. Treasuries, probably by the middle of 2008.

Liquidity traditionally dries up a bit at yearend but the recent credit crunch has exacerbated the problem.

Powell also said the Canadian dollar has been battling a market than has turned much less bullish on the currency since the Bank of Canada cut its key interest rate last week for the first time since April 2004.

A 5 percent jump in oil prices also helped to support the Canadian dollar since Canada is a major producer and exporter of oil.

BONDS END LOWER

Canadian bond prices handed back gains recorded during the previous session as a stronger-than-expected Canadian trade surplus and the central bank action reduced the safe-haven appeal of government debt.

Canada’s trade surplus rose to C$3.32 billion in October from C$2.81 billion in September, although the value of both imports and exports fell. Analysts had, on average, predicted October’s surplus would be C$2.45 billion.

The move by major central banks, under the leadership of the U.S. Federal Reserve, to help ease the tight conditions in the money market followed Tuesday’s Fed decision to cut its key rate by 25 basis points to 4.25 percent.

Many market players had called for a 50 basis point cut from the Fed.

The two-year bond fell 29 Canadian cents to C$100.88 to yield 3.777 percent. The 10-year bond slid 71 Canadian cents to C$99.83 to yield 4.022 percent.

The yield spread between the two-year and 10-year bond moved to 24.5 basis points from 30.3 at the previous close.

The 30-year bond declined 97 Canadian cents to C$114.54 to yield 4.141 percent. In the United States, the 30-year Treasury yielded 4.544 percent.

The three-month when-issued T-bill yielded 3.89 percent, up from 3.86 percent at the previous close.

Reporting by Frank Pingue; Editing by Peter Galloway

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