CANADA FX DEBT-C$ steady ahead of expected Fed rate cut

Tue Dec 16, 2008 9:48am EST
 
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 * C$ coming off 1.6 percent rally in previous session
 * Weak domestic data overshadowed by U.S. housing report
 * Bond prices get boost after soft economic data
 By Frank Pingue
 TORONTO, Dec 16 (Reuters) - The Canadian dollar was little
changed against the U.S. dollar on Tuesday as traders avoided
making any big commitments until after a widely expected
Federal Reserve interest-rate cut due later in the session.
 Domestic bond prices were slightly higher given weak U.S.
housing data and a Canadian report that showed factory sales
dropped in October.
 At 9:40 a.m. (1440 GMT), the Canadian unit was at C$1.2315
to the U.S. dollar, or 81.20 U.S. cents, up from C$1.2317 to
the U.S. dollar, or 81.19 U.S. cents, at Monday's close.
 The Canadian dollar rallied 1.6 percent during the previous
session in a move credited more to a sliding greenback ahead of
an expected rate cut rather than any domestic fundamentals. It
was unable to build on the momentum.
 That is because traders stuck near the sidelines until the
Fed's rate decision and to hear its thinking on policy at
around 2:15 p.m. (1915 GMT). The Fed is expected to lower rates
by at least half a percentage point to 0.5 percent.
 "I think yesterday we had some action but now ahead of the
Fed the market is unwilling to take any significant directional
bid on the Canadian dollar," said Matthew Strauss, senior
currency strategist at RBC Capital Markets.
 "So we're looking at rangebound trading ahead of the Fed
with, if anything, a slight strengthening bias against a
generally weakening U.S. dollar."
 The main piece of Canadian data for the day showed factory
sales fell 0.5 percent in October from September, in line with
expectations, on weaker prices for coal and petroleum
products.
 But the data did not weigh on the domestic currency as it
came out at the same time as U.S. data that showed new housing
starts and permits plunged to record lows in November. That
data kept the greenback pinned lower.
 The Canadian dollar also drew some support from higher oil
prices, which rose on expectations that the Organization of the
Petroleum Exporting Countries would agree to its biggest supply
cut ever when the group meets in Algeria this week.
 BONDS PUSH HIGHER
 Canadian bond prices rose after the weak data from both
Canada and the United States, which was enough to convince
dealers to seek the security of government debt.
 The weak data followed a soft U.S. report from Monday that
showed manufacturing took another hit, while price declines
provided a reminder that deflation may be on the horizon.
 With the looming Fed rate cut due later in the session,
bond prices were likely to remain higher.
 Canada's economic calendar will pick up as the week goes on
with the key reports being October retail sales figures due
Thursday, and Friday's consumer prices report for November,
which is expected to show another drop in prices.
 The two-year bond was up 1 Canadian cent at C$102.48 to
yield 1.457 percent. The 10-year rallied 30 Canadian cents to
C$109.95 to yield 3.031 percent.
 The yield spread between the two-year and 10-year bond was
at 160 basis points, up from 161 basis points at the previous
close.
 The 30-year bond was up 35 Canadian cents at C$122.15 to
yield 3.730 percent. In the United States, the 30-year Treasury
yielded 2.945 percent.
 (Editing by Frank McGurty)