Canadian dollar rattled by tumble in oil prices

Wed Oct 15, 2008 4:21pm EDT
 
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 * Oil prices drop to 13-month low
 * Plunge on stock markets adds to pressure on currency
 * Bond prices rally as stocks fall, data disappoints
 By Frank Pingue
 TORONTO, Oct 15 (Reuters) - The Canadian dollar fell
sharply versus the U.S. dollar on Wednesday as a slide in the
price of oil, a key Canadian export, dragged the currency down
by 2 percent and stripped it of the gains recorded early this
week.
 Canadian bond prices closed higher across the curve due to
some weak U.S. economic data, an equity market selloff and
market expectations for more central bank rate cuts.
 The Canadian dollar closed at C$1.1879 to the U.S. dollar,
or 84.18 U.S. cents, down from C$1.1616 to the U.S. dollar, or
86.09 U.S. cents, at Tuesday's close.
 Part of the Canadian dollar's decline was pegged on a slide
in oil prices to a 13-month low due to fears that economic
weakness will cut further into demand for crude.
 Since Canada is the main supplier of oil to the United
States, and commodities make up about half of Canadian exports,
the currency often follows the direction of oil prices.
 Another factor dragging the Canadian currency lower was the
slide in equity markets, which creates an environment for the
greenback to rally as investors become wary of risk.
 "More weakness in crude ... and the focus there still seems
to be on lessening global demand," said Shane Enright, currency
strategist at CIBC World Markets. "And as you see continued
asset market weakness ... the prime beneficiary of all of these
things has been the U.S. dollar.
 During the overnight session, the Canadian dollar rallied
to C$1.1540 to the U.S. dollar, or 86.66 U.S. cents, but it
spent the entire North American session relinquishing those
gains and returning to last week's levels.
 News late on Tuesday that Canada had reelected a minority
Conservative government had little impact on the currency.
 A report on Wednesday from the Conference Board of Canada
said the Canadian economy will avoid slipping into a recession
as domestic demand helps offset the negative impact of falling
commodity prices.
 BOND PRICES RALLY
 Canadian bond prices all ended higher as Tuesday's big
rally by Toronto's main stock index was followed by a wave of
selling on Wednesday while economic data continued to paint a
bleak picture for the global economy
 "Economic data is pointing towards a global recession,"
said Sheldon Dong, fixed income analyst at TD Waterhouse
Private Investment. "And equity markets ran out of steam and
that surprised a lot of people ... so that would also explain
the demand for bonds."
 The Toronto Stock Exchange's main index fell 6.6 percent,
while the Dow Jones industrial average dropped 7 percent.
 The latest batch of economic data showed a steep slide in
U.S. September retail sales, while a gauge of manufacturing in
New York state fell to its lowest level since its inception in
2001. Also, European data has continued to disappoint.
 With markets still focused on the global financial crisis
and data showing that no end is in sight, expectations for more
central bank interest rate cuts remain on the table.
 The two-year bond rose 15 Canadian cents to C$100.99 to
yield 2.269 percent. The 10-year bond was up 43 Canadian cents
at C$103.85 to yield 3.768 percent.
 The yield spread between the two-year and the 10-year bond
moved to 123 basis points from 116 basis points at the previous
close.
 The 30-year bond rallied C$1.27 to C$113.15 to yield 4.205
percent. In the United States, the 30-year Treasury yielded
4.226 percent.
 (Editing by Peter Galloway)