CANADA FX DEBT-C$ ends slightly weaker as uncertainty prevails

Fri Aug 12, 2011 4:53pm EDT
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 * C$0.9907 to the U.S. dollar, or $1.0094
 * More volatility seen on economic uncertainty
 * Bond prices lower, Canada underperforms
 * BoC rate views shifting; BMO, RBC see 2012 hikes
 (Adds analyst comments, details)
 By Andrea Hopkins
 TORONTO, Aug 12 (Reuters) - Canada's dollar eased slightly
on Friday as unexpectedly weak U.S. consumer sentiment data
kept investors nervous, capping a volatile week that saw the
Canadian currency drop to below parity with the U.S. dollar.
 "If your largest trading partner is suffering, it is not
necessarily the best situation, so that's enough reason to stay
cautious with respect to the Canadian dollar," said David Watt,
senior currency strategist at Royal Bank of Canada.
 A survey of U.S. consumer confidence by the University of
Michigan showed sentiment fell to its lowest level since 1980,
spooking investors, but a stronger-than-expected gain in retail
sales excluding autos helped Wall Street stocks regain ground.
[.N] [ID:N1E77B08W]
 The mixed U.S. data reinforced concerns that the U.S.
economy is growing only slowly, and coupled with worries about
a debt contagion in Europe, suggested global stock and currency
markets face a rocky road ahead.
 "The market backdrop is still extremely skittish and there
still is potential to have some very nervous days going
forward," Watt said.
 The Canadian dollar often moves in tandem with riskier
assets like stocks and commodities. Toronto stocks closed
little changed on Friday despite choppy trade.[.TO]
 The Canadian currency CAD=D4 closed the session at
C$0.9907 to the U.S. dollar, or $1.0094, slightly below
C$0.9883 to the U.S. dollar, or $1.0118, at Thursday's close.
 That was still well off the week's low of C$1.001 to the
U.S. dollar, the first time since February that the Canadian
dollar weakened below the one-for-one level with the
 With some investors moving back into riskier assets, bond
prices were mostly lower. Canada's two-year bond CA2YT=RR was
off 4 Canadian cents to yield 0.931 percent, while the 10-year
bond CA10YT=RR fell 10 Canadian cents to yield 2.469
 Some Canadian bond yields hit their lowest level on record
this week as stock markets initially plunged.
 But Canadian bonds on Friday underperformed U.S.
Treasuries, which were supported by the dismal data there.
 Canadian bond prices fell even though more Canadian banks,
which only last month expected the Bank of Canada to resume
tightening this fall, pushed rate hike forecasts into next
year. [ID:nN1E77B11K]
 Canadian overnight index swaps, which are based on
expectations for the Bank of Canada's key policy rate, have
largely priced in a 25-basis-point rate cut by year-end.
However, the odds have been pared back in recent sessions as
stocks rallied. BOCWATCH
 "I don't think the market pricing is wildly unreasonable.
There is a far outside risk that the bank could cut in a real
emergency whereas it's very tough to see them raising rates,"
said Doug Porter, deputy chief economist at BMO Capital
 Porter said the Bank of Canada will likely remain on the
sidelines until the second quarter next year, and then raise
once per quarter in 2012.
 RBC Capital Markets said in a report on Thursday that,
based on current conditions, the priced-in rate cuts appear
"wholly unjustified." It also forecast the Bank of Canada will
delay its first rate hike until the second quarter of 2012.
 Watt said they'd previously forecast rate hikes in
September 2011.
 "We think that both the market conditions and economic
backdrop are going to remain uncertain for some time," he
 (Additional reporting by Ka Yan Ng; Editing by Jeffrey