February 15, 2008 / 9:26 PM / in 10 years

Canadian dollar closes lower after midday meltdown

TORONTO (Reuters) - The Canadian dollar fell versus the U.S. dollar on Friday as low liquidity ahead of a holiday weekend and weak domestic data pulled the rug from under the currency and knocked it lower for the second straight week.

Domestic bond prices finished higher across the curve as the weak report on Canadian manufacturers supported market expectations that the Bank of Canada would cut interest rates for the third consecutive time when it sets rates in March.

The Canadian dollar closed at C$1.0075 to the U.S. dollar, or 99.26 U.S. cents, down from C$1.0002 to the U.S. dollar, or 99.98 U.S. cents, at Thursday’s close.

The bulk of the currency’s decline came in one swift move just after midday as the U.S. dollar broke through C$1.0024, or 99.76 U.S. cents, and then shot to C$1.0115, or 98.86 U.S. cents.

The early-session weakness for the Canadian dollar came after domestic data showed factory shipments of vehicles plunged in December to their lowest level in over a decade.

That report followed economic data on Thursday that showed Canada’s trade surplus shrank more than expected in December. Each supported market expectations for more Bank of Canada rate cuts.

“Mostly, what we’ve seen is a real one-two punch of very soft domestic data in the last two days between yesterday’s trade number and today’s manufacturing number,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“The main point here is there are just some questions as to how well the Canadian economy can hold up in the face of a marked U.S. slowdown.”

With Canadian financial markets closed on Monday for Ontario’s Family Day, and U.S. markets closed for President’s Day, moves in the Canadian dollar were likely exaggerated given low liquidity as many investors took off early for the long weekend.

Investors will return next week with a slew of key events, including a speech by Bank of Canada Governor Mark Carney to the British Columbia Chamber of Commerce on Monday, as well as key January consumer price index data on Tuesday.

BONDS RALLY

Bond prices were all higher as the weak string of domestic data convinced many investors to take on more secure assets like government debt.

The Bank of Canada has cut its key lending rate by 25 basis points at each of its last two meetings, putting the overnight rate at 4.00 percent, and is widely expected to cut again on March 2.

Given the weak Canadian data and widespread expectations for more rates cuts, some experts felt the bond market could have rallied further.

“It seems like the Canadian (bond) market’s not really paying that much attention to the domestic data,” said Porter. “I guess, given the big rally we’ve seen in (U.S.) treasuries and the weak Canadian data, I would’ve expected a larger rally in Canada today.”

The two-year bond rose 9 Canadian cents to C$102.16 to yield 2.989 percent. The 10-year bond climbed 57 Canadian cents to C$101.45 to yield 3.813 percent.

The yield spread between the two- and 10-year bond was 82.4 basis points, down from 85.4 basis points at the previous close.

The 30-year bond was up C$1.28 at C$113.50 to yield 4.194 percent. In the United States, the 30-year treasury yielded 4.580 percent.

The three-month when-issued T-bill yielded 3.25 percent, down from 3.26 percent at the previous close.

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