CANADA FX DEBT-C$ rides commodity surge to 5-week high

Mon Jul 20, 2009 12:18pm EDT
 
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 * Climbs as high as C$1.1019 to the U.S. dollar
 * Commodity rally, risk appetite drive gains
 * Bond prices little changed across curve
 (Adds details)
 By Frank Pingue
 TORONTO, July 20 (Reuters) - The Canadian dollar shot to
its highest level in just over five weeks on Monday, driven by
a rally in commodity prices and increased optimism about the
state of the global economic recovery.
 The currency rallied as high as C$1.1019 to the U.S.
dollar, or 90.75 U.S. cents, which marked its strongest level
since June 12. The move came on the heels of its 4.4 percent
rise last week.
 "The markets have been feeling a lot better about things,
whether it's the earnings reports that we saw last week or just
the fact that people are starting to feel that things are
starting to turn the corner," said Steve Butler, director of
foreign exchange trading at Scotia Capital. "The world just
looks like an awfully safe place once again this morning."
 By 12:00 noon (1600 GMT), the Canadian unit had eased
slightly to C$1.1074 to the U.S. dollar, or 90.30 U.S. cents,
but was still up from Friday's close of C$1.1161 to the U.S.
dollar, or 89.60 U.S. cents.
 Higher prices for oil and gold, both key Canadian exports,
helped lure traders to the currency, while demand for riskier
assets also lent support.
 The currency's rise came ahead of the Bank of Canada's
interest rate announcement on Tuesday, when it is expected to
stick to its conditional pledge and keep rates at the current
near-zero level. [ID:nN17484031]
 Plenty of eyes will likely be on the bank's accompanying
statement to see if it offers an updated view on the Canadian
dollar. In its June statement, the bank said a strong currency
could offset positive factors such as improved financial
conditions and commodity prices. [ID:nN0479627]
 "(The Bank of Canada) mentioned the currency last time and
so you have to think they will say something about it again
this time," said Butler. "But it might just fall on deaf ears
because, unless they do something about it, talk is cheap."
 According to RBC Capital Markets, the recent strength of
the Canadian dollar is on the Bank of Canada's radar screen,
but it would still need to rise much further to convince the
central bank to intervene in currency markets.
 "The (Bank of Canada) is likely to continue to rely on
rhetoric to cap (Canadian dollar) rallies," David Watt, senior
currency strategist at RBC Capital Markets, wrote in a note.
 "However, if CAD maintains its momentum, short of signs of
a stunning rebound in the global economy, the risk of a
stronger response will increase exponentially as USD/CAD head
well below C$1.10."
 BONDS MOSTLY FLAT
 Domestic bond prices were flat as bargain-hunting helped
erase a fall suffered after news that U.S. lender CIT Group
CIT.N may have reached a deal that could allow it to avoid
bankruptcy.
 A rally in global equities overnight was followed by a rise
by North American stocks as the CIT news removed some
uncertainty for the financial sector, which is still recovering
from its deep crisis.
 The S&P/TSX composite index .GSPTSE rose 1 percent at the
open and went on to reach its highest level since June 15 as
demand for government debt was muted.
 Helping cushion the slide in some bond prices was data that
showed Canadian wholesale trade dropped in May for the eighth
consecutive month to its lowest level since 2005.
[ID:nN2016541]
 A separate report showed foreigners scooped up a record
C$19.38 billion worth of Canadian bonds in May. [nOTT001662]
 The two-year Canada bond was down 3 Canadian cents at
C$100.04 to yield 1.238 percent, while the 10-year bond rose 8
Canadian cents to C$102.20 to yield 3.484 percent.
 The 30-year bond was up 20 Canadian cents at C$116.65 to
yield 4.003 percent. In the United States, the 30-year Treasury
bond yielded 4.547 percent.
 (Editing by Rob Wilson)