CANADA FX DEBT-C$ cuts decline on rebounding oil
* 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.
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)
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