CANADA FX DEBT-C$ dips after China tightens; euro hopes support
* C$ lower at C$0.9894, or $1.0107
* China tightening offset by improved euro zone outlook
* Bonds decline across the curve
* Focus on Bank of Canada next week
By Solarina Ho
TORONTO, Jan 14 (Reuters) - Canada's dollar nudged lower against the greenback on Friday, pressured by bank tightening in China, but easing concerns about the euro zone debt crisis helped the commodity-linked currency recoup early losses.
The euro was set for its best week in over a 1-1/2 years following successful securities auctions by indebted euro zone members, calming fears of a credit crisis in the region. [FRX/]
"We've seen a bit of a revival in the euro," said Craig Wright, chief economist at Royal Bank of Canada. "When people get a little more comfortable with risk, they tend to sell the U.S. dollar and buy others, including Canada."
Strength in North American equity markets and oil prices also helped provide support. [O/R] [.N]
Earlier in the session, the Canadian dollar fell nearly a penny, moving closer to U.S. dollar parity, after China's central bank raised the reserve requirement ratio for its biggest banks. [ID:nTOE706030]
Beijing's move fanned expectations that China's appetite for commodities could wane, which hit resources prices as well as currencies of commodity-exporting countries like Canada.
"I don't think anybody is really that shocked that China is slowly trying to raise rates and raise some of the banking requirements," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"If the commodities continue to materially trade lower then I think that may be a game changer but I think it's too soon to say just yet ... if the U.S. economy picks up some steam then that will be supportive for the Canadian dollar as well."
The currency CAD=D4 finished at C$0.9894 to the U.S. dollar, or $1.0107, down from Thursday's North American finish of C$0.9892 to the U.S. dollar, or $1.0109.
"It's not a huge move, relative to recent history. So a little bit of stability's probably not a bad thing," said Wright, adding that in the near term, he expected the currency to continue to trade stronger than the U.S. dollar.
The currency moved in a tight range on Friday, hitting a high of C$0.9885 and low of C$0.9978, with a slew of U.S. data having limited impact.
"It was a heavy data day, but not a heavy data-surprise day," said Wright.
FOCUS ON BANK OF CANADA NEXT WEEK
Attention is shifting to the Bank of Canada, which will be announcing its latest rate decision and issuing its monetary policy report next week.
"It will be interesting to see how they're going to weigh the strength of the currency against a pick-up in the U.S.," said Butler. "Things in Canada look pretty solid so there is that fine line."
Given the economic developments, particularly south of the border, analysts are expecting the central bank to raise its 2011 growth forecast. But it is also seen as wary about using language that could spark further Canadian dollar gains. [ID:nN25118365]
A Reuters poll of 45 forecasters unanimously predicted the Bank of Canada will keep interest rates unchanged, though more than half the respondents said the next rate hike would occur sometime in the first half of 2011. [CAD/POLL]
Canadian government bond prices eased across the curve, as investors moved toward riskier assets.
The interest rate-sensitive two-year bond CA2YT=RR was off 2.5 Canadian cent to yield 1.790 percent, while the 10-year bond CA10YT=RR lost 15 Canadian cents to yield 3.271 percent. (Editing by Jeffrey Hodgson)
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