January 18, 2008 / 2:42 PM / in 10 years

Dollar higher as equity markets rebound

TORONTO (Reuters) - The Canadian dollar was higher versus the U.S. dollar on Friday morning as a rebound in equity markets helped comfort investors who have been worried about what impact a global slowdown could have on Canada.

Domestic bond prices were lower across the curve as the latest piece of Canadian economic data showed manufacturing sales rose more than expected in November.

At 9:25 a.m. EST, the Canadian unit was at 97.51 U.S. cents, valuing a U.S. dollar at C$1.0255, up from 97.11 U.S. cents, or C$1.0298, at Thursday’s close.

The Canadian dollar rallied to 97.89 U.S. cents after the manufacturing sales data, but it gave the gains back quickly as the report did not alter the widespread expectations for a Bank of Canada rate cut next week.

Helping support the Canadian currency was the rebound in equity markets overnight and expectations for those gains to spill into North American stock markets as well.

Given the nature of Canada’s exports like oil and gold, the Canadian dollar often follows the direction of equity markets since it is seen as a strong play on global growth.

“We had a substantial selloff in North American equity markets yesterday, but during the overnight session a lot of the global equity markets started to stabilize,” said George Davis, chief technical strategist at RBC Capital Markets.

“The primary driver of price action in the current environment is what equity markets are doing... when equity markets come under pressure we see the Canadian dollar sell off and vice versa.”

Since posting a 17.5 percent gain versus the U.S. dollar in 2007, the Canadian dollar has stumbled about 3 percent in 2008. Its drop has come amid a sharp selloff in global equity markets this week as fears of a U.S. recession took hold.

Also weighing on the Canadian dollar are widespread market expectations for the Bank of Canada to lower its key interest rate when it makes its next monetary policy announcement on January 22.

A Reuters poll taken on Thursday showed that Canada’s 12 primary securities dealers all expect the central bank to cut rates by 25 basis points to 4.00 percent next week. All but one of the dealers see another 25 basis point cut in March.

BONDS DROP

Canadian bond prices handed back a slice of recent gains as the latest piece of domestic data ended a steady string of economic reports that pointed to a weaker economy.

But the fall in bond prices was kept in check as the data did not carry enough weight to alter Bank of Canada interest rate expectation.

The overnight Canadian Libor rate was at 4.3450, percent, up from 4.27633 percent on Thursday.

Thursday’s CORRA rate was 4.2486 percent, up from, 4.2616 on Wednesday. The Bank of Canada publishes the previous day’s rate at around 9:00 a.m. daily.

The two-year bond dropped 2 Canadian cents to C$101.79 to yield 3.245 percent. The 10-year bond was down 18 Canadian cents at C$101.60 to yield 3.795 percent.

The yield spread between the two-year and 10-year bond was 54.7 basis points, up from 53.2 basis points at the previous close.

The 30-year bond was down 45 Canadian cents at C$115.87 to yield 4.069 percent. In the United States, the 30-year Treasury yielded 4.288 percent.

The three-month when-issued T-bill yielded 3.65 percent, up from 3.61 percent at the previous close.

Editing by Renato Andrade

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