Canadian dollar lifted by oil, bonds fall

Tue May 13, 2008 5:11pm EDT
 
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 * Canadian dollar buoyed by record high oil prices
 * Briefly climbs above parity with U.S. dollar
 * Bond prices fall along with U.S. market
 By John McCrank
 TORONTO, May 13 (Reuters) - The Canadian dollar pushed
higher against the U.S. dollar on Tuesday, helped by a surge in
oil prices, but it failed to maintain a break above parity with
the greenback.
 Bond prices fell along with the larger U.S. market on
stronger than expected U.S. retail sales data and warnings
about inflation from various U.S. Federal Reserve officials.
 The Canadian dollar closed at C$1.0028 to the U.S. dollar,
or 99.72 U.S. cents, up from C$1.0044 to the U.S. dollar, or
99.56 U.S. cents, at Monday's close.
 The commodity-linked currency rallied to a session high of
US$1.0015, making a greenback worth 99.85 Canadian cents, as
oil touched another record high.
 U.S. crude oil CLc1 prices climbed as high as $126.98 a
barrel, sparked by Iran saying it was considering a production
cut. Crude settled at $125.80, up $1.57. See [ID:nN13568161]
 Canada is a major oil exporter and the currency is often
influence by moves in the commodity.
 The currency's inability to maintain its move above parity
is likely due to expectations that interest rate differentials
between Canada and the United States will narrow, putting some
downward pressure on the loonie, said Shane Enright, currency
strategist at CIBC World Markets.
 "I think, in terms of relative interest rate differentials,
we're probably past the worst level for the Canadian dollar
against a number of the currencies, but in the U.S., if you
look at the fed funds futures, the market is very much of the
view that the Fed is done easing rates," he said.
 That outlook has given broad-based strength to the
greenback.
 "It's an environment where, even with soaring energy
prices, it is going to be hard for the Canadian dollar to make
material gains through the parity level against the U.S.
dollar," said Enright.
 The Bank of Canada is expected to make at least one more
cut of 25 basis points, to 3.00 percent, to help spur growth in
the face of the U.S. economic downturn.
 The next Canadian data for investors to digest comes on
Thursday with the survey of manufacturing for March.
 BONDS FALL
 Bond prices, with no domestic data to key off, took
direction from the larger U.S. market.
 "We've got a fair sized selloff going on and a pretty good
flattener as well, but those are just the kid brother to what
the U.S. is up to," said Eric Lascelles, chief economics and
rates strategist at TD Securities."
 The initial impetus for the selloff was a U.S. retail sales
report that topped market expectations, signaling a resilient
U.S. consumer. The numbers came in with a 0.2 percent drop, but
stripping out autos, showed a 0.5 percent gain.
 "To me, the move seems a little bit overblown, but I guess
some contribution has come from the various Fed speakers
warning quite profoundly about inflation, so it's a bit of a
double whammy," said Lascelles.
 U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday
the credit crisis was not over, while other U.S. central bank
officials cautioned that rising energy costs could put upward
pressure on inflation.
 The two-year bond fell 15 Canadian cents to C$101.87 to
yield 2.803 percent. The 10-year slid 34 Canadian cents to
C$103.03 to yield 3.604 percent.
 The yield spread between the two- and 10-year bonds was
80.1 basis points, down from 83.2 at the previous close.
 The 30-year bond dipped 15 Canadian cents to C$115.81 for a
yield of 4.067 percent. In the United States, the 30-year
treasury yielded 4.638 percent.
 The three-month when-issued T-bill yielded 2.69 percent, up
from 2.67 percent at the previous close.