Canada dollar rebounds on higher commodity prices
* Canadian dollar up slightly after volatile session
* Rising gold, oil prices help currency's rebound
* Bonds rally in response to weak equity markets
By John McCrank
TORONTO, Sept 17 (Reuters) - A late rally by commodity prices helped the Canadian dollar recover from steep losses to end slightly higher against the U.S. dollar on Wednesday.
Canadian bond prices rose as investors sought the safety of government debt as equity markets sold off on the turbulence in the financial markets.
The Canadian dollar closed at C$1.0688 to the U.S. dollar, or 93.56 U.S. cents, up from C$1.0695 to the U.S. dollar, or 93.50 U.S. cents, at Tuesday's close.
The currency spent the day in a wide range between C$1.0617, or 94.19 U.S. cents, and C$1.0810, or 92.51 U.S. cents.
"It's just been a ridiculously volatile session with an absolute turnaround," said Steve Butler, director of foreign exchange at Scotia Capital.
The currency hit its highest level in the overseas session and then steadily weakened until midday, dropping 1.6 U.S. cents, until commodity prices started to rally and gave it a boost.
Commodities make up about half of Canada's exports.
Gold prices XAU= jumped almost $90 to $866 on a safe haven bid, while U.S. crude CLc1 rose $6 to $97.16 a barrel, helped by a softer greenback and data that showed U.S. inventories fell last week. See [ID:nN17290446] [ID:nLH518535].
The safe haven bid was spurred by growing fears over the outlook for the U.S. financial sector, and concerns over the Federal Reserve's bailout of insurer American International Group (AIG.N: Quote).
The bailout followed the recent bankruptcy protection filing by Lehman Brothers Holdings Inc LEH.N, the sale of investment firm Merrill Lynch MER.N, and government takeovers of U.S. mortgage insurance giants Freddie Mac FRE.N and Fannie Mae FNM.N.
The upheaval in the U.S. financial sector has made market players loath to lend to one another, intensifying the tumult, said Butler
"Liquidity is absolutely the worst I've seen in a long, long time and volatility is way up, so when things do turn, moves are clearly getting exaggerated because the markets are so illiquid."
Canadian bonds rallied on a safe haven bid as equity markets took big losses.
"Stocks are just getting killed," said Levente Mady, fixed income strategist at MF Global Canada Co.
He added, however, that the moves may have gone too far.
"If you look at the stock market, there are certainly a number of measures that indicate that things are overdone a little bit, so you could make the argument that we might see a little bit of a relief rally in stocks, which would have a negative implication for the bond market," Mady said.
On the data front, foreign investors reduced their holdings in Canadian securities in July for the first time since November 2007, dumping stocks and bonds for a net divestment of C$5.59 billion ($5.22 billion), Statistics Canada said.
Canadian investors resumed their acquisition of foreign stocks in the month, resulting in a net investment in foreign securities of C$1.25 billion.
The two-year bond rose 3 Canadian cents to C$100.40 to yield 2.561 percent, while the 10-year added 10 Canadian cents to C$106.65 to yield 3.436 percent.
The yield spread between the two-year and 10-year bond was 87.5 basis points, up from 85.8 basis points at the previous close.
The 30-year bond gained 5 Canadian cents to C$117.95 for a yield of 3.948 percent. In the United States, the 30-year Treasury yielded 4.078 percent.
The three-month when-issued T-bill yielded 1.75 percent, down from 2.15 percent at the previous close. (Reporting by John McCrank; editing by Rob Wilson)
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