Canada dollar hit by credit woes, lower commodities

Mon Mar 17, 2008 5:58pm EDT
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 TORONTO, March 17 (Reuters) - The Canadian dollar fell on
Monday, dropping briefly below parity with the U.S. dollar for
the first time since Feb. 25, dragged down by credit market
woes, along with lower oil and base metal prices.
 Canadian bond prices rose across the curve as investors
sought the safety of government debt due to a rout on the
Toronto Stock Exchange.
 The Canadian dollar closed at US$1.0007, valuing a U.S.
dollar at 99.93 Canadian cents, down from US$1.0140, valuing a
U.S. dollar at 98.62 Canadian cents, at Friday's close.
 The currency touched a low of C$1.0015 against the
greenback, or 99.85 Canadian cents, towards the end of the
 The Canadian dollar began to lose ground overnight along
with the greenback as investors worried that recent emergency
liquidity-boosting measures by U.S. Federal Reserve would not
be enough to ease the strains in the U.S. financial system.
 As the session wore on, the greenback managed make up some
of its losses, but a drop in the prices of some key Canadian
exports, including oil and base metals, left the Canadian
dollar unable to find any traction.
 The Fed's latest attempt to ease liquidity pressures came
on Sunday, when it cut its discount rate by 25 basis points to
3.25 percent.
 The move came as JP Morgan Chase (JPM.N: Quote) snapped up Bear
Stearns BSC.N, made vulnerable by a cash crunch, for $2 a
share, less than one-tenth of the bank's share price on
 Recent domestic data has shown that the Canadian economy is
still running at a quick clip, but most investors believe the
effects of the U.S. economic downturn will make themselves felt
in this country.
 The United States takes in more than three-quarters of
Canadian exports and the two countries share the world's
largest trading relationship.
 The latest domestic data showed Canada's factory sales
rebounded in January, but with investors focused on financial
market troubles, the report had little impact on the currency.
 Higher car sales boosted Canadian manufacturers' sales in
January by 1.3 percent, topping expectations for a gain of 0.9
 The key Canadian piece of economic data this week will be
February's inflation report, due on Tuesday.
 "If we see it picking up slightly, I don't think the market
is going to pay too much attention... however, if it falls even
closer to the 1 percent end of the inflation target range, then
it would further confirm that there is nothing standing in the
way of the Bank of Canada to continue easing," said Matthew
Strauss, senior currency strategist at RBC Capital Markets.
 The central bank cut interest rates by 50 basis points
earlier this month to 3.5 percent, and a low inflation reading
could signal more aggressive easing when the bank makes its
next policy decision in April, Strauss said.
 Canadian bond prices rallied on a safe-haven bid as stocks
in Toronto sold off in response to the credit concerns south of
the border.
 The bond market will be focused on the U.S. Federal Reserve
meeting on Tuesday.
 Futures markets are pricing in a 100-basis-point cut to the
Fed's main lending rate, which would be among the largest
reductions in the Fed's modern history as it tries to limit the
damage from the economic downturn.
 "If they cut rates by 100 basis points, that takes them
down to 2 percent, so they're running out of ammunition very
quickly," said Sheldon Dong, fixed income analyst at TD
Waterhouse Private Investment.
 The two-year bond rose 21 Canadian cents to C$103.22 to
yield 2.306 percent. The 10-year bond climbed 68 Canadian cents
to C$104.68 to yield 3.402 percent.
 The yield spread between the two- and 10-year bond was
109.6 basis points, up from 105.3 points at the previous
 The 30-year bond added 84 Canadian cents to C$117.60 to
yield 3.975 percent. In the United States, the 30-year treasury
yielded 4.271 percent.
 The three-month when-issued T-bill yielded 2.10 percent,
down from 2.23 percent at the previous close.