Canada dollar ends lower on U.S. recession concern

Tue Oct 14, 2008 4:38pm EDT
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 * Concerns about slumping U.S. demand weigh on currency
 * Bond unloaded as Toronto stocks rally
 By Frank Pingue
 TORONTO, Oct 14 (Reuters) - The Canadian dollar dropped
against the greenback on Tuesday as commodity prices eased and
concerns about a U.S. recession persisted even as the U.S.
government unveiled a fresh plan to shore up banks.
 Tuesday's close was lower than the currency's level in late
Monday trading. But the Bank of Canada did not provide a close
on Monday because it was a national holiday. On Tuesday, the
Canadian dollar finished above its last official close on
 Domestic bond prices ended down across the curve, but the
slide paled in comparison to the tumble by the bigger U.S.
Treasury market, especially considering the massive rally by
the Toronto Stock Exchange's main index.
 The Canadian dollar closed at C$1.1616 to the U.S. dollar,
or 86.09 U.S. cents, well off the C$1.1305 to the U.S. dollar,
or 88.46 U.S. cents, its level early in the session.
 Still Tuesday's close was higher than Friday's finish at
C$1.1808 to the U.S. dollar, or 84.69 U.S. cents.
 The Canadian dollar spent the bulk of the North American
session relinquishing gains recorded on Monday when governments
pledged to pour cash into struggling banks to build confidence
in the global financial system.
 But the multi-billion guarantees for the banking system did
little to stem nagging concerns about the fallout a potential
U.S. recession would have on Canadian exports.
 "Very few are in any doubt that the U.S. economy is on the
cusp of a recession, and global growth as a whole will be quite
a bit weaker as well which definitely clouds the outlook for
commodity prices and the Canadian dollar," said Doug Porter,
deputy chief economist at BMO Capital Markets.
 The early strength in the Canadian dollar, which followed
its 8.4 percent skid last week, was carried over from Monday's
session, was helped by news that the U.S. Treasury Department
will inject $250 billion of capital in major U.S. banks.
 But commodities prices eased from earlier levels, which is
a negative for the Canadian dollar since Canada is the biggest
supplier of oil to the United States, and commodities make up
around half of Canadian exports.
 Porter also suggested the lack of any plan from Canada to
assist the banking sector may have been another drag on the
Canadian dollar.
 Canadian bond prices were pinned lower the entire session
as investors raced back into Canadian equity markets to play
catch-up with the surges in U.S. equity markets in Monday's
session while Canada's stock market was closed.
 The Toronto Stock Exchange's main index jumped 18 percent
at the open on Tuesday before closing with a 873-point gain or
9.6 percent.
 "The net decline in Canadian bonds is relatively muted
considering we saw one of the bigger gains in the TSX on
record," said Porter. "So the backup on (bond) yields is
actually quite tame."
 Earlier on Tuesday, the Bank of Canada announced a series
of "exceptional liquidity" measures to shore up the Canadian
financial system and said it could take more steps if needed.
 The bank said it would offer C$10 billion in liquidity to
money markets on Oct. 15 through a deal to buy securities and
then resell them 27 days later.
 The two-year bond dropped 26 Canadian cents to C$100.85 to
yield 2.337 percent. The 10-year bond slid 35 Canadian cents to
C$103.35 to yield 3.829 percent.
 The yield spread between the two-year and the 10-year bond
moved to 116 basis points from 128 basis points at the previous
 The 30-year bond fell 58 Canadian cents to C$111.62 to
yield 4.291 percent. In the United States, the 30-year Treasury
yielded 4.273 percent.