CANADA FX DEBT-C$ weakens as economy, rate outlook weigh

Wed Aug 10, 2011 5:18pm EDT
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 * C$ weakens to C$0.9948 to the U.S. dollar, or $1.0052
 * Bond yields drop to near record lows
 * Bank of Canada seen keeping low rates longer post-Fed
 By Andrea Hopkins
 TORONTO, Aug 10 (Reuters) - The Canadian dollar weakened
against the U.S. currency on Wednesday, hurt by concern about a
global economic slump, Europe's debt woes and the prospect of
prolonged low interest rates.
 Global stocks also fell as rumors about the health of
French banks sparked concern that the euro zone's debt crisis
could claim new victims. U.S. stocks fell more than 4 percent.
 On the upside, safe-haven gold hit another record, while
Toronto stocks bucked the trend to end 0.74 percent higher.
 "Global prospects aren't good, in part driven by U.S.
economic prospects ... That's all negative for the Canadian
dollar at this stage," said Michael Gregory, senior economist
at BMO Capital Markets.
 "We've come off our peaks, and right now I think we'll
drift around parity, plus or minus a cent, moving sideways. And
trade off what happens south of border and commodity prices."
 A late surge in oil prices, an important Canadian export,
failed to give much lift to the Canadian currency. Brent crude
futures rose 4 percent after a government report showed U.S.
oil inventories fell last week. [O/R]
 The Canadian dollar CAD=D4 ended the North American
session at C$0.9948 to the U.S. dollar, or $1.0052, more than a
penny below Tuesday's session close at C$0.9789 to the U.S.
dollar, or $1.0216.
 Tuesday's dovish statement by the U.S. Federal Reserve has
raised expectations that the Bank of Canada to keep its
interest rates lower for longer, with markets even betting on a
rate cut by year-end. [ID:nN1E77915R]
 Canadian overnight index swaps, which are based on
expectations for the Bank of Canada's key policy rate, have
fully priced in odds of a 25-basis points rate cut later this
year on mounting fears of a global slowdown. BOCWATCH
 "What it means for the BoC is that we have even greater
conviction toward our forecast that the BoC is on hold until
next spring or possibly much longer," wrote Scotia Capital
economists Derek Holt and Karen Cordes Woods on Wednesday.
 Higher interest rates tend to help currencies strengthen by
attracting international capital flows.
 While many economists believe a Canadian rate hike could
happen next year, the currency isn't expected to return to
recent peaks until the risk of a U.S. recession fades.
 "As long as we're on easing watch south of the border, the
Canadian dollar probably has a weakening bias," Gregory said.
 Canada's sale of 3-year government bonds met with solid
demand earlier in the session, helped by continued global
anxiety about the U.S. economy and expectations that rates will
stay low for a long time. [ID:nN1E77914B]
 The C$3 billion ($3.03 billion) auction of bonds produced
an average yield of 0.965 percent, down from 2.037 percent at
the last 3-year bond auction in May.
 Canadian bond yields, like their U.S. peers, have traded at
or near record lows in the wake of the Fed decision, though
Canadian bonds lagged the price gains made by Treasuries on
Wednesday. [US/]
 Canada's 10-year bond CA10YT=RR gained C$1.10 to yield
2.335 percent In the wake of the 2008 financial crisis its
yield had fallen to around 2.5 percent.
 (Editing by Jeffrey Hodgson)