CANADA FX DEBT-C$ drops, bonds soar in flight to safety

Wed Mar 16, 2011 4:48pm EDT
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 * C$ slides to $1.0083, return to parity in view
 * Safe-haven bid pushes bonds higher as equities volatile
 * Fears rise that Japan nuclear crisis is out of control
 (Updates to close)
 By Ka Yan Ng
 TORONTO, March 16 (Reuters) - The Canadian dollar CAD=D4
dropped against the U.S. currency for a third straight session
on Wednesday, trapped in a global rush to the exits from risky
assets sparked by the nuclear crisis in Japan.
 North American equity markets tumbled, with a drop of about
2 percent across major U.S. stock indexes, as news reports
about Japan's crisis grew darker and deepened investor fears.
The same news sparked a surge into the safety of government
bonds, including Canada's.
 The U.N. nuclear watchdog chief said the situation at
Japan's stricken Fukushima Daiichi nuclear power plant was
"very serious". Workers withdrew briefly from the plant because
of surging radiation levels and a helicopter failed to drop
water on the most troubled reactor. [ID:nLDE72E24B]
 "Equities are bailing and the global backdrop is speaking
to a risk-off environment. The events that are transpiring and
unfolding in Japan are the catalysts for much of the price
action in currencies," said Jack Spitz, managing director of
foreign exchange at National Bank of Canada.
 "The Canadian dollar will underperform in a market
environment that speaks to risk aversion. Today is no
different. The headlines are that much bolder these days."
 He said there was a major flight to traditional safe-haven
currencies, including the U.S. dollar, the Swiss franc and the
Japanese yen.
 The Canadian dollar fell as low as C$0.9968 to the U.S.
dollar, or $1.0032, and was within 6 ticks of the 4-1/2 week
low it hit on Tuesday, when it fell 2-1/2 cents before paring
losses. Just last week, the currency was trading at its highest
level in more than three years: C$0.9684 to the U.S. dollar, or
 It finished at C$0.9918 to the U.S. dollar, or $1.0083, on
Wednesday, down from Tuesday's close of C$0.9840 to the U.S.
dollar, or $1.0163.
 Trouble in Bahrain and concerns about euro zone debt
weighed on risk sentiment, but sent oil prices 2 percent higher
and gave minor support to the commodity-linked Canadian
 "All the attention has been on Japan and the nuclear
reactors, but at the same time, you can't take your eye off
what is happening in the Middle East," said John Kurgan, senior
market strategist at Lind-Waldock Canada.
 "If oil should for whatever reason...shoot up, I wouldn't
be surprised to see the Canadian dollar strengthen here too."
 But some currency watchers said Japan's earthquake and
unfolding radiation disaster could drive Canada's currency
below parity with the greenback in the near term, for the first
time since Feb. 1, as investors dump assets tied most closely
to global economic growth. [ID:nN15236117]
 As part of Wednesday's safe-haven bid, investors rushed to
U.S. Treasuries. Canadian government bonds also rose, but
mostly underperformed except in the short-dated issues.
 The two-year Canadian government bond CA2YT=RR soared 17
Canadian cents to yield 1.541 percent, while the 10-year bond
CA10YT=RR advanced 47 Canadian cents to yield 3.145 percent.
 Earlier, Canadian manufacturing sales data showed a much
greater-than-expected 4.5 percent jump in January from
December. It was a bright spot following a spate of soft
Canadian data that has helped scale back expectations of any
interest rate hikes before midyear. [ID:nN16104517] ECONCA
 The data didn't stay long at the forefront of market
attention, however.
 "I don't think interest rates are really something
investors are looking at right now," Kurgan said.
 (Reporting by Ka Yan Ng; editing by Peter Galloway)