CANADA FX DEBT-C$ slides on Europe's woes, weaker commodities

Wed May 19, 2010 1:22pm EDT
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   * Hits session low of C$1.0538, or 94.89 U.S. cents
 * Fear grows that Europe will drag on Canadian growth
 * Bonds mixed, but 30-year auction sees good demand
 By Claire Sibonney
 TORONTO, May 19 (Reuters) - The Canadian dollar hit its
weakest level against the U.S. currency since May 7 on
Wednesday, hurt by falling commodity prices and a growing fear
Europe's woes will hurt Canada's economic recovery.
 Jittery investors, already worried that deep government
spending cuts in Europe will stifle growth, sent prices of
global equities and other riskier assets even lower after
Germany clamped down on short-selling of some securities.
 "There continues to be a scramble for U.S. dollar liquidity
and I think that's part of why the Canadian dollar is suffering
right now," said Tom Nakamura, a fixed-income portfolio manager
at AGF Investments.
 "The underlying issues, the problems in Europe, are still
there," he added.
  At 1:15 a.m. (1715 GMT), the Canadian dollar CAD=D4 was
at C$1.0480 to the U.S. dollar, or 95.42 U.S. cents, down from
C$1.0370 to the U.S. dollar, or 96.43 U.S. cents, at Tuesday's
 The currency hit a session low of C$1.0538, or 94.89 U.S.
 Germany surprised markets on Tuesday with a ban on "naked"
short-selling of some stocks and bonds. In naked short-selling,
a trader sells a financial instrument short, betting that it
will fall, but without first borrowing the instrument or
ensuring it can be borrowed, as would be done in conventional
short-selling. [ID:nN18512882]
 The move sent shockwaves through markets and contributed to
a drop in commodity prices, including a slide in oil prices to
their lowest intraday level since Sept. 30. [O/R]
 BMO Capital Markets warned in a note to clients that the
European situation poses "serious risks" to Canada's economic
outlook, largely through financial market and commodity price
channels as opposed to direct impacts on trade.
 "We have already nudged lower our view on the Canadian
dollar, and the downside risks for the currency are now much
more prominent than a few short weeks ago," wrote economists
Doug Porter and Benjamin Reitzes.
 Yields on overnight index swaps, which trade based on
expectations for the Bank of Canada's key policy rate, have
fallen in recent weeks and on Wednesday indicated just a 51
percent chance of a June 1 rate increase. BOCWATCH
 Currencies tend to strengthen as interest rates rise as
higher rates attract capital flows.
 The European news overshadowed a report on Wednesday that
showed Canadian wholesale trade grew twice as much as expected
in March at 1.4 percent. [ID:nN19110938]
 Canadian bonds prices were mixed, though an auction for
C$1.4 billion  in 30-year bonds saw firm demand. [CA/AUC]
 The two-year government bond CA2YT=RR was up 8.5 Canadian
cent to yield 1.724 percent, while the 10-year bond CA10YT=RR
dropped 7 Canadian cents to yield 3.406 percent.
 (Additional writing by Jeffrey Hodgson; editing by Rob