CANADA FX DEBT-C$ backs off five-week high as oil prices slip

Wed Dec 17, 2008 9:53am EST
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 * C$ unable to build on momentum made after Fed rate cut
 * Sagging oil prices ahead of OPEC meeting weigh on C$
 * Weak domestic data keeps most bond yields at record lows
 By Frank Pingue
 TORONTO, Dec 17 (Reuters) - Canada's dollar weakened
against the U.S. dollar on Wednesday as lower prices for oil, a
key Canadian export, knocked the currency off a five-week high
reached overnight after the Federal Reserve cut U.S. rates to
near zero.
 Domestic bond prices were mostly higher, keeping most
yields at record lows, after data showing Canadian wholesale
trade had fallen by more than expected in October.
 At 9:25 a.m. (1425 GMT), the Canadian unit was at C$1.2041
to the U.S. dollar, or 83.05 U.S. cents, down from C$1.2018 to
the U.S. dollar, or 83.21 U.S. cents, at Tuesday's close.
 During the overnight session the Canadian dollar rallied to
C$1.1951 to the U.S. dollar, or 83.68 U.S. cents, as overseas
investors unloaded the greenback after learning that the Fed
lowered interest rates more aggressively than economists had
expected on Tuesday.
 But the momentum did not carry through into the early part
of the North American session. That may mark the start of a
typical slowdown in volumes with just under two
holiday-shortened weeks of trading left in the year.
 "The market just mentally checked out after the Fed
yesterday," said Shaun Osborne, chief currency strategist at TD
Securities. "It was the last kind of big event before the
holidays and I think once that was out of the way we just
haven't really seen a whole lot in terms of flows."
 Weighing on the the Canadian dollar early on Wednesday was
a drop in oil prices ahead of a meeting of the Organization of
the Petroleum Exporting Countries, which is widely expected to
agree to big cut in production.
 The drag in oil prices, which remain above the four-year
trough hit in early December, could be a sign that the OPEC cut
has already been priced in the market.
 The Canadian dollar's earlier surge had been attributed to
a weaker U.S. dollar after the Fed set a target range for its
federal funds of zero to 0.25 percent, down from its previous
target of 1 percent. The Fed also said it would employ "all
available tools" to dispel a year-long recession.
 But more pockets of strength for the Canadian dollar, which
remains on track to record its first back-to-back weeks of
gains since Nov. 7, are expected in the near term.
 "While the U.S. dollar has stabilized a little bit here I
still think there are some very significant headwinds for the
currency moving forward and it's just a question on when it
starts to fall again," said Osborne.
 Canadian bond prices rallied on the long end of the curve
and kept yields pinned at record lows after the latest domestic
data added to a growing string of reports that support the idea
of a weaker economy.
 Also lending support to domestic bond prices was ongoing
demand for higher-yield investments following the Fed cut.
 The Canadian data showed the value of wholesale trade fell
by 1.8 percent in October from September, which was far worse
than the unchanged growth expected by the market.
 The next key Canadian economic data is October retail sales
figures on Thursday followed Friday's consumer prices report
for November.
 The two-year bond was down 2 Canadian cents at C$102.80 to
yield 1.292 percent. The 10-year rallied 80 Canadian cents to
C$111.50 to yield 2.852 percent.
 The yield spread between the two-year and 10-year bond was
at 176 basis points, up from 174 basis points at the previous
 The 30-year bond jumped C$2.65 to C$126.15 to yield 3.535
percent. In the United States, the 30-year treasury yielded
2.587 percent.
 (Editing by Frank McGurty)