CANADA FX DEBT-C$ rallies as markets embrace risk

Wed Oct 12, 2011 4:55pm EDT
 
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   * C$ ends at C$1.0173 vs US$, or 98.30 U.S. cents
 * Bond prices track U.S. Treasuries lower
 * Canada bond auction demand contrasts with Treasuries
 (Updates to North American session close)
 By John McCrank
 TORONTO, Oct 12 (Reuters) - The Canadian dollar hit its
highest level against the U.S. dollar in almost three weeks on
Wednesday as risk appetite grew on hopes that a crisis in the
euro zone would be avoided, lessening the chances of a global
recession.
 Slovakia, the only euro zone country to not yet approve an
increase in the zone's emergency fund, seen as critical to
containing the region's debt crisis, looked set to come to an
agreement by Friday. [ID:nL5E7LC0JT]
 That helped the euro rise to a near one-month high against
a weaker greenback and global stocks rallied as investors
unwound safe-haven bids. [ID:nL5E7LC0L7]
 "A lot of money is coming out of the Treasury market
sending yields sharply higher," said Sal Guatieri, senior
economist at BMO Capital Markets.
 The Canadian dollar CAD=D3 hit C$1.0135, or 98.67 U.S.
cents, its highest level since Sept. 22.
 The currency weakened off by the end of the North American
session, but still held on to gains of around a penny,
finishing at C$1.0173 to the U.S. dollar, or 98.30 U.S. cents.
That compared with Tuesday's North American close of C$1.0279
to the U.S. dollar, or 97.29 U.S. cents.
 Canada is a major exporter of commodities, which have been
under pressure in recent months as fears over the state of the
global economy put demand into question.
 On Wednesday, other commodity-linked currencies, including
the New Zealand and Australian dollars, also made large gains.
 "It reflects optimism that the global economy may avoid a
recession and therefore, there's an improved outlook for
commodities and that's supporting commodity-based currencies,"
Guatieri said.
 U.S. crude prices actually ended slightly lower at $89.59 a
barrel on profit-taking after rising 13 percent over the
previous five sessions, while gold prices rose 0.8 percent to
$1,678.80 an ounce in response to the weaker greenback. [O/R]
[MET]
 Michael O'Neill, vice-president of FX Trading at RJOFX
Canada, said he expects the Canadian dollar to trade in a range
of C$0.9980 and C$1.0230 for the rest of the week.
 David Watt, vice-president, senior fixed income and
currency strategist at RBC Capital Markets, said he thought the
risk rally may be slightly overdone.
 "Even if we get the best-case scenario for some of the EU
contagion risks being contained, there are still a number of
cyclical risks to year-end," he said, adding that the world
trade outlook still called for a further slowdown. "Not a
catastrophe, but a further slowdown."
 On the Canadian data front, new home prices edged up 0.1
percent in August for the second straight month, showing more
moderate increases than in the second quarter, according to
Statistics Canada. [ID:nN1E79B04U]
 Bond prices drifted lower across the board, tracking U.S.
Treasuries, as fears about Europe's debt crisis receded. [US/]
 The two-year Canadian government bond CA2YT=RR shed 8
Canadian cents to yield 1.026 percent, while the 10-year bond
CA10YT=RR dropped 50 Canadian cents to yield 2.356 percent.
 Canada's sale of five-year government bonds met with
healthy appetite on Wednesday, despite the unwinding of risk
aversion. [ID:nN1E79B0W6]
 The C$3.5 billion ($3.4 billion) auction of bonds produced
an average yield of 1.729 percent, down sharply from 2.309
percent at the last five-year bond auction in July, before
global markets took a turn for the worse.
 The Canadian bond auction, however, was overshadowed by a
$21 billion auction of reopened 10-year U.S. Treasury notes,
which had the weakest demand in nearly a year as investors
turned to beaten down stocks and away from the lower-risk
government debt. [ID:nN1E79B15T]
 "That just shows where the pressing concerns are," Watt
said. "The pressing concerns aren't with the Canadian financial
situation, the concerns are the U.S. Treasury market."
 (Reporting by John McCrank; editing by Rob Wilson)