CANADA FX DEBT-C$ rises with oil, equity rally; bonds slide
* C$ rises to C$0.9891 to the U.S. dollar, or $1.0110
* Bond prices retreat on equity market rally
* Bank of Canada injects funds to keep rate on target (Updates to close)
By Ka Yan Ng
TORONTO, Aug 11 (Reuters) - The Canadian dollar rose against the U.S. currency on Thursday as oil prices and equity markets rebounded, though gains were moderate as concerns over the European debt crisis and global economic growth weighed.
U.S. crude futures gained and the S&P 500 and Nasdaq rose more than 4 percent. Toronto's main stock index also hit a one-week high, gaining 2.79 percent, after a negative start.
Canada's dollar also had a slow start, but began to build momentum after strong U.S. jobs data took some of the focus away from fears about the health of the euro zone banking system and helped send stock markets higher.
"We're following the equity correlation pretty much for the time being," said David Tulk, chief Canada macro strategist at TD Securities.
The Canadian dollar CAD=D4 finished at C$0.9883 to the U.S. dollar, or $1.0118, up from Wednesday's North American close at C$0.9948 to the U.S. dollar, or $1.0052.
John Curran, senior vice-president at CanadianForex, said the Canadian dollar was still a choice currency by sovereigns for reserves while healthy corporate demand was also a supportive factor.
But this was "balanced by the risk-off scenario and the rate hike expectations, which have been lessened due to the Fed's actions and recent poor Canadian data," he said.
Slumping exports propelled Canada to a much larger trade deficit than expected in June, data showed on Thursday, which will likely slash second-quarter growth to well below already modest predictions. [ID:nN1E77A0LU]
The data followed Tuesday's dovish statement by the U.S. Federal Reserve that it would keep interest rates near zero for another two years. That upped expectations the Bank of Canada would also maintain low interest rates 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 point rate cut later this year on mounting fears of a global slowdown. BOCWATCH
The Canadian dollar has managed to stay above parity with the greenback since briefly dipping below a one-for-one footing on Tuesday as worries intensified about the twin U.S. and European debt crises.
"Things usually overshoot in panic situations like we've just had. That we haven't gone back (below parity) is a solid positive for the Canadian dollar," said Curran.
MIXED BOND PERFORMANCE VS U.S.
Bond prices fell as equity markets were solidly higher, while a dismal U.S. bond auction, its worst long bond auction in 2-1/2 years, also contributed to the selloff. [US/]
Under these conditions, the 10- and 30-year Canadian government bonds outperformed their U.S. counterparts as the offering took a hit from extreme financial market volatility due to worries about the stability of French banks and a slowing U.S. economy.
Short-dated maturities were down as well, but underperformed U.S. Treasuries.
Canada's two-year bond CA2YT=RR fell 13 Canadian cents to yield 0.917 percent, while the 10-year bond CA10YT=RR dropped C$1.12 to yield 2.455 percent.
The Bank of Canada injected hundreds of millions of dollars into the market this week, for the first time since December, to lower the overnight interest rate toward its 1 percent target and improve liquidity. [ID:nN1E77A1E6]
The bank injected C$305 million on Wednesday and C$375 million on Thursday, its website showed. Analysts said the action was consistent with the bank's routine operations and did not reflect any systemic pressures. (Reporting by Ka Yan Ng; editing by Rob Wilson)
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