Commodities lift Canadian dollar, bonds mixed

Thu Mar 13, 2008 5:11pm EDT
 
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 By John McCrank
 TORONTO, March 13 (Reuters) - The Canadian dollar rose
against a softer U.S. dollar on Thursday, as record high oil
and gold prices gave the commodity-linked currency some
support, but gains were limited on concerns that the U.S.
economic slowdown could soon spill over into Canada.
 Domestic bond prices rose on the short end on news of more
credit market stress and some weaker-than-expected U.S. data.
 The Canadian dollar closed at US$1.0146, valuing a U.S.
dollar at 98.56 Canadian cents, up from US$1.0099, or 99.02
Canadian cents per U.S. dollar, at Wednesday's close.
 During the session, the currency hit a high of U.S. 1.0206,
valuing a U.S. dollar at 97.98 Canadian cents.
 The price of crude oil rose to a record $111 and gold
prices surged above the $1,000 mark, as weakness in the
greenback prompted investors to buy the commodities as a hedge
against an economic slowdown.
 Canada is a major producer of oil and gold and its currency
was buoyed by the commodities' strength.
 But the Canadian dollar's inability to make stronger gains
given the commodity backdrop, the weak greenback, a favorable
U.S.-Canada interest rate differential, and a raft of strong
recent domestic data, suggests a weaker currency in the months
to come, said Shaun Osborne, currency strategist at TD
Securities.
 "Risk aversion is still simmering under the markets here,
despite the slightly better mood in the markets today, and the
risk of a spillover from the U.S. slowdown is still very much
in the forefront of people's minds in terms of the outlook for
Canada."
 Osborne said he expects the Canadian dollar to fall
gradually versus the U.S. dollar over the next couple of
quarters and to end up between 94 and 95 U.S. cents by the end
of the year.
 About 40 percent of the Canadian economy is export-oriented
and the U.S. takes in more than three-quarters of Canadian
exports.
 Bank of Canada Governor Mark Carney reiterated in a speech
to the Toronto Board of Trade that the country's economy is
taking a hit from the global credit turmoil and more interest
rate cuts will likely be required.
 However, he also added that Canada money markets are
healthier than in most other countries.
 Carney offered no hint as to the size of the next interest
rate cut on April 22.
 BONDS RISE ON SHORT END
 Canadian bond prices rose on the short end on a safe haven
bid as the credit crunch claimed another victim and data showed
the wallets of U.S. consumers were tightening.
 Bonds unwound some of their gains towards the end of the
session, however, especially on the long end.
 "It looks like the market has given back some of those
gains as equities have come back a bit after S&P's announcement
that there might be a light at the end of the subprime tunnel,"
said Sal Guatieri, senior economist at BMO Capital Markets.
 Standard and Poor's said writedowns for large financial
institutions are likely past the halfway point, easing
investors' nerves after a deluge of bad news in recent months.
 In the latest example, Amsterdam-listed fund Carlyle
Capital Corp CARC.AS, an affiliate of U.S.-based buyout firm
Carlyle Group, said the credit crunch caused it to default on
about $16.6 billion of debt.
 That sent global stock markets down and increased demand
for government debt.
 A weaker than expected U.S. retail report followed, ramping
up concern of a recession in the world's biggest economy.
 The two-year bond was up 10 Canadian cents at C$102.83 to
yield 2.543 percent. The 10-year bond rose 9 Canadian cents to
C$103.77 to yield 3.516 percent.
 The yield spread between the two- and 10-year bond was 97.3
basis points, up from 91.1 points at the previous close.
 The 30-year bond fell 11 Canadian cents to C$116.49 to
yield 4.033 percent. In the United States, the 30-year Treasury
yielded 4.448 percent.
 The three-month when-issued T-bill yielded 3.30 percent, up
from 3.20 percent at the previous close.