Canada dollar ekes out gain on flows; bonds mixed

Fri Dec 14, 2007 4:55pm EST
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 By Lynne Olver and John McCrank
 TORONTO, Dec 14 (Reuters) - The Canadian dollar rose
slightly against the U.S. dollar on Friday, bucking a global
trend after strong U.S. consumer inflation data caused the
greenback to rally against most currencies.
 Canadian bond prices were mixed and U.S. treasuries fell,
after the U.S. consumer price index for November rose at its
fastest pace in more than two years and raised doubts about
further Federal Reserve interest rate cuts.
 The Canadian dollar closed at C$1.0170 to the U.S. dollar,
or 98.33 U.S. cents, up from C$1.0201 to the U.S. dollar, or
98.03 U.S. cents, on Thursday.
 The Canadian currency fell as low as 97.59 U.S. cents
overnight, down 11.6 percent from its modern-day high of
US$1.1039, hit on Nov. 7.
 But it rebounded at midday, gave back some gains, and
eventually ended the session higher, despite the fact that most
other currencies fell against the U.S. dollar, said David
Powell, a currency analyst at IDEAglobal in New York.
 "The selloff of the Canadian dollar has been pushing its
limits and if you look at the price action in the foreign
exchange markets today, it seems that (market players) are
unwilling to bring the Canadian dollar any lower, given the
large amount of ground that the currency has already given up
over the past six weeks or so," Powell said.
 "I think the market is starting to think that perhaps the
move has come quite far."
 Other strategists said that corporate and other flows
likely played a role in the Canadian dollar's buoyancy.
 "Today's move was not fundamentally based, because the
fundamentals (economic data) suggest it should have traded in
the other direction, so you've got to chalk it up to a
flow-related move," said Stewart Hall, market strategist at
HSBC Canada.
 Another factor helping boost the U.S. dollar globally may
be the repatriation of funds by U.S. financial institutions
before year-end, other observers said.
 Canadian bond prices were mixed, as shorter-dated
maturities fell in tandem with the larger U.S. market, but
longer-dated domestic issues rose slightly.
 "You've got tough numbers coming out of the U.S. with
regards to inflation, and that's your greatest fear (for
bondholders)," Hall said. However, some institutions such as
pension plans still need to buy long-dated bonds, which could
explain the price rise at the long end of the Canadian curve,
he said.
 The U.S. inflation data and a slowing U.S. economy present
a conundrum for the Federal Reserve: higher inflation will make
it difficult for the central bank to keep cutting interest
rates to contain the U.S. economic slowdown.
 The two-year bond fell 2 Canadian cents to C$100.58 to
yield 3.938 percent. The 10-year bond slid 13 Canadian cents to
C$98.98 to yield 4.131 percent.
 The yield spread between the two-year and 10-year bond
moved to 19.3 basis points from 21.4 at the previous close.
 The 30-year bond rose 32 Canadian cents to C$113.11 to
yield 4.218 percent. In the United States, the 30-year treasury
yielded 4.658 percent.
 The three-month when-issued T-bill yielded 3.91 percent, up
from 3.88 percent at the previous close.
 (Reporting by Lynne Olver and John McCrank; Editing by Rob