CANADA FX DEBT-C$ rises with oil, equity rally; bonds slide

Thu Aug 11, 2011 4:55pm EDT
 
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   * 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)