January 15, 2008 / 10:30 PM / 10 years ago

Canadian dollar rises against soft US$

4 Min Read

TORONTO (Reuters) - The Canadian dollar edged higher against a broadly weaker U.S. dollar on Tuesday, but a lack of domestic data ahead of next week's Bank of Canada monetary policy announcement left it rangebound.

Domestic bond prices rallied as market players sought safe haven investments due to plunging stock markets.

The Canadian dollar closed at 98.37 U.S. cents, valuing a U.S. dollar at C$1.0166, up from 98.22 U.S. cents, or C$1.0181, at Monday's close.

The currency spent the session in a relatively tight range of C$1.0192 to C$1.0135 to the U.S. dollar.

"I think that shows a market that is unclear of the direction it really wants to take the Canadian dollar," said David Watt, senior currency strategist at RBC Capital Markets.

A lack of domestic data was partly responsible for the Canadian dollar underperforming most other major currencies against a broadly weaker U.S. dollar said Watt.

The greenback took a beating after U.S. retail sales numbers for December came in slightly below market expectations.

"I think the weakness in the U.S. retail sales was to an extent overplayed because we should be accustomed now to the idea that holiday spending spreads over January and February because of gift cards," said Watt.

But the softer than expected data stoked fears of a recession in the world's biggest economy, prompting traders to sell the greenback.

After a stellar year in 2007, the Canadian dollar has been lagging most other major currencies against the U.S. dollar, in part because of Canada's close economic ties to its big southern neighbor, which has been rattled by the subprime mortgage crisis and growing fears of a recession.

The Canadian unit slid 1.8 percent last week after a string of soft domestic data all but locked in a Bank of Canada interest rate cut.

The central bank is widely expected to cut its key overnight rate by 25 basis points to 4.00 percent when it next sets monetary policy on January 22.

Bonds Rise

Bond prices ended higher across the curve on safe haven bids as North American equity markets suffered steep losses as earnings results from a number of key U.S. companies missed market expectations.

Two-year and 10-year bond yields have been at September 2005 levels since the end of last week, but they are still underperforming their U.S. counterparts.

"I think that's an indication of the greater uncertainty in the U.S. compared to Canada, and not just in the economic outlook, but in the health of the financial system overall," said Carlos Leitao, chief economist at Laurentian Bank of Canada.

The two-year bond rose 3 Canadian cents to C$101.83 to yield 3.235 percent. The 10-year bond gained 21 Canadian cents to C$101.73 to yield 3.779 percent.

The yield spread between the two-year and 10-year bond was 54.4 basis points, down from 55.4 at the previous close.

The 30-year bond was up 48 Canadian cents at C$116.67 to yield 4.027 percent. In the United States, the 30-year treasury yielded 4.276 percent.

The three-month when-issued T-bill yielded 3.62 percent, down from 3.65 percent at the previous close.

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