Canadian dollar weakens as risk aversion sets in

Mon Mar 17, 2008 9:45am EDT
 
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 By Frank Pingue
 TORONTO, March 17 (Reuters) - The Canadian dollar dropped
against the U.S. dollar on Monday as nagging concerns about the
health of the U.S. economy convinced investors to unload risky
assets despite lofty commodity prices.
 Domestic bond prices rose across the curve as the worsening
crisis in U.S. financial markets raised investors' appetite for
secure assets like government debt, while Canadian data took a
backseat.
 At 9:35 a.m. (1335 GMT), the Canadian dollar was at
US$1.0055, valuing a U.S. dollar at 99.45 Canadian cents, down
from US$1.0140, valuing a U.S. dollar at 98.62 Canadian cents,
at Friday's close.
 The currency's fall comes after liquidity-boosting measures
by the U.S. Federal Reserve over the weekend did little to ease
worries about the health of the economy in the United States,
which consumes the bulk of Canada's exports.
 News that Bear Stearns will be bought by rival JP Morgan
Chase for a bargain price compounded the deteriorating risk
sentiment that shook the Canadian dollar as investors moved out
of higher-yielding currencies.
 "There's been a dramatic decline in risk appetite so risk
aversion is moving higher." said George Davis, chief technical
strategist at RBC Capital Markets. "But for the most part ...
the Canadian dollar has really been on the sidelines compared
to a lot of the other currencies."
 The domestic currency's fall was likely cushioned by a rise
in prices for gold and oil, two key Canadian exports, to record
highs earlier on Monday.
 Indeed, the Canadian dollar held up well compared with some
other commodity-linked currencies such as the Australian
dollar.
 Domestic data that showed Canada's factory sales rebounded
in January had little impact on the currency. The key Canadian
piece of economic data due this week will be the consumer price
index report for February 2008, due on Tuesday.
 "I suspect through most of this week the data will take a
secondary role," said Doug Porter, deputy chief economist at
BMO Capital Markets. "I'm not saying it's going to be ignored,
but I think, especially today, it will take a back seat."
 BONDS RALLY
 Canadian bond prices were higher as investors shrugged off
a stronger-than-expected piece of Canadian data and took their
cue from the bigger U.S. Treasury market, where fears about the
banking system sparked a mad dash for government debt.
 Higher car sales boosted Canadian manufacturers' sales in
January by 1.3 percent, topping expectations for a gain of 0.9
percent.
 But the fire sale of Bear Stearns and the cut in the Fed's
discount rate kept investors hungry for more secure assets.
 "Canadian bonds are following their Treasury counterparts,"
said Porter. "They are not quite keeping up with the serious
rally we're seeing in the U.S. ... but we are seeing a lot of
multi-decade lows, or near-multi-decade lows, probed or at
least approached at various maturities."
 The overnight Canadian Libor rate LIBOR01 was 3.6750
percent, down from 3.5816 percent on Friday.
 Thursday's CORRA rate CORRA= was 3.4545 percent, down
from 3.4798 on Wednesday. The Bank of Canada publishes the
previous day's rate at around 9 a.m. daily.
 The two-year bond dropped 23 Canadian cents to C$103.24 to
yield 2.297 percent. The 10-year bond fell 36 Canadian cents to
C$104.36 to yield 3.437 percent.
 The yield spread between the two- and 10-year bond was
119.6 basis points, up from 105.3 points at the previous
close.
 The 30-year bond dropped 1 Canadian cent to C$116.75 to
yield 4.020 percent. In the United States, the 30-year treasury
yielded 4.321 percent.
 The three-month when-issued T-bill yielded 2.08 percent,
down from 2.23 percent at the previous close.
 (Editing by Bernadette Baum)