Canadian dollar rises, but outlook caps gains
By John McCrank
TORONTO, Jan 14 (Reuters) - The Canadian dollar made a modest rebound against a markedly weaker U.S dollar on Monday, but recent soft economic data prevented it from finding more traction.
Domestic bond prices, which rallied last week on a string of weak Canadian economic reports, gave back some of their gains as investors turned from the safety of government debt in favor of equity markets.
The Canadian dollar closed at 98.22 U.S. cents, valuing a U.S. dollar at C$1.0181, up from 98.07 U.S. cents, or C$1.0197, at Friday's close.
The Canadian dollar's slight rise came against a greenback that took much larger losses against other major currencies, as fears that soft corporate results could push the world's largest economy closer to a recession.
The euro and the yen touched seven-week highs against the U.S. dollar, while the Swiss franc rose to an all-time high.
"I think the Canadian dollar is a little less appetizing to many people, in part because the argument that Canada is decoupled from the U.S. seems a little dubious," said Eric Lascelles, chief economics and rates strategist at TD Securities.
The Canadian dollar's rise follows a 1.8 percent slide last week amid weak domestic data, notably Friday's disappointing jobs report which all but locked in a Bank of Canada rate cut later this month.
The central bank released its fourth-quarter Business Outlook Survey on Monday, which indicated a slowing economy as the high Canadian currency, tighter credit conditions and slowing U.S. demand take their toll.
However, the survey also showed that a significant number of Canadian companies had difficulty meeting an unexpected increase in demand during the quarter, despite slower economic growth and a lower inflation outlook.
Analysts said the results of the survey suggest the Bank of Canada has room to lower interest rates in the months ahead, but tight capacity means the pace of easing will be milder than in the United States.
The Bank of Canada makes its next monetary policy announcement on Jan. 22, and most market players expect a 25 basis point cut to the overnight rate.
Canadian bond prices slipped lower as investors turned from government debt to rallying equity markets.
However, worries over financial issues may prompt a renewed move to safety in the days ahead, said Mark Chandler, fixed income specialist at RBC Capital Markets.
"I think there is a fair degree of concern what we might see in terms of the bank earnings in the U.S.," he said.
Several large U.S. banks, battered by subprime-related losses, are due to report results this week and investors fear more heavy losses.
The two-year bond was down 1 Canadian cent at C$101.80 to yield 3.250 percent. The 10-year bond fell 6 Canadian cents to C$101.53 to yield 3.804 percent.
The yield spread between the two-year and 10-year bond was 55.4 basis points, up from 55.8 at the previous close.
The 30-year bond was down 12 Canadian cents at C$116.20 to yield 4.051 percent. In the United States, the 30-year treasury yielded 4.362 percent.
The three-month when-issued T-bill yielded 3.65 percent, down from 3.67 percent at the previous close.
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