CANADA FX DEBT-C$ rallies as markets embrace risk
* 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)
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