CANADA FX DEBT-C$ cuts decline on rebounding oil

Mon Mar 14, 2011 5:00pm EDT
 
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 * C$ pares losses to $1.0282
 * Short-term factors include Japan, Middle East
 * Bonds firm across curve in flight to safety
 (Updates to close)
 TORONTO, March 14 (Reuters) - The Canadian dollar pared
losses against the U.S. dollar on Monday, regaining ground with
oil prices, which settled flat after an early slide on concerns
that oil demand in quake-ravaged Japan will slow.
  The commodity-linked Canadian currency often moves in
tandem with oil prices because Canada is a major oil exporter.
  Oil rose off its lows due to continuing unrest in the
Middle East despite worries about last week's cataclysmic
earthquake and tsunami in Japan.
  "Oil prices have moved higher. They were down quite a bit
earlier today, and to be up for the day, that's providing some
offsetting support," said Sal Guatieri, senior economist at BMO
Capital Markets.
 Although the Canadian dollar CAD=D4 was injured by a
selloff in world stocks in reaction to the devastation in
Japan, it was still trading in the same C$0.97-C$0.98 range
it's been in for most of the past two weeks.
 It finished at C$0.9726 to the U.S. dollar, or $1.0282,
down from Friday's North American session close of C$0.9711 to
the U.S. dollar, or $1.0298.
 The Canadian dollar was dented a bit early in the day after
Statistics Canada said Canadian industries ran at 76.4 percent
of capacity in the fourth quarter of 2010, barely edging up
from a downwardly revised 76.2 percent in the previous
quarter.
 Economists surveyed by Reuters had forecast a 79.0 percent
capacity-utilization rate in the fourth quarter.
[ID:nSCLEEE7A6]
 John Curran, senior vice president at CanadianForex, said
overall market sentiment was shying away from risk. He pointed
to dangers from continuing unrest in North Africa and the
Middle East, the impact of the Japan catastrophe, oil-price
weakness, and "relatively benign" Canadian economic data as
reasons for the market to shift toward the safe-haven
greenback.
 Curran said he expected the Canadian dollar to test
long-term support at C$0.9880 to the U.S. dollar. But it will
likely drift down to that level, rather than dropping sharply,
he said.
 "I think this will be a little bit of a corrective move
here. The longer-term trend is still positive for Canada but
the short-term factors are playing into a bit of the weakness,"
he said.
 BONDS UP
 Short-dated interest rate-sensitive Canadian government
bonds were on the rise as the weaker-than-expected capacity-use
figures on Monday added to a recent spate of soft Canadian
data.
 The data has prompted market players to scale back
expectations that the Bank of Canada will raise interest rates
soon. According to a calculation of yields on overnight index
swaps, the central bank's September rate-setting date is the
first for which the market is fully pricing in a rate increase.
BOCWATCH
 Bonds were also well-supported by a flight-to-safety bid,
pushing prices higher across the curve, while market players
also looked ahead to Tuesday's U.S. Federal Reserve policy
meeting.
 BMO's Guatieri said he expected no change in the U.S.
central bank's tone in its statement, or in the bond-buying
program that is intended to bolster the U.S. economy.
 "The Fed should affirm its commitment to complete its
current asset purchase program and keep rates on hold for an
extended period," he said.
 The two-year Canadian government bond CA2YT=RR rose 12
Canadian cents to yield 1.682 percent, while the 10-year bond
CA10YT=RR  advanced 26 Canadian cents to yield 3.243
percent.
 (Reporting by Ka Yan Ng; editing by Peter Galloway)