CANADA FX DEBT-C$ jumps, bonds back off as equities firm

Tue Jul 20, 2010 4:53pm EDT
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   * C$ ends at 95.71 U.S. cents
 * Bond prices turn lower as stocks rebound
 * Bank of Canada raises rates, sees recovery slowing
 * All Canada dealers see September rate hike, Q4 cloudy
 (Updates to close)
 By Claire Sibonney and Ka Yan Ng
 TORONTO/OTTAWA, July 20 (Reuters) - The Canadian dollar
zoomed nearly a penny higher against the U.S. dollar on
Tuesday, taking its cue from firming equity and commodity
markets and looking past a slightly more subdued outlook on the
world economy issued by the Bank of Canada.
 A rise in oil prices also played a role, pushing the
commodity-linked currency CAD=D4 to a session high of
C$1.0435 to the U.S. dollar, or 95.83 U.S. cents. [O/R]
 North American stock markets reversed losses made early in
the day on disappointing U.S. housing starts data for June and
weaker-than-expected revenues by IBM and Texas Instruments.
[.N] [ID: nN20249501] and closed convincingly higher.
 "That's put investors in a little bit better of a mood and
that's what you're seeing reflected in the traditional risk
trades like long Canadian dollars and maybe a bit of an uptick
in bond yields," said David Tulk, senior macro strategist at TD
 The Canadian dollar CAD=D4 ended at C$1.0448 to the U.S.
dollar, or 95.71 U.S. cents, up from Monday's finish of
C$1.0549 to the U.S. dollar, or 94.80 U.S. cents.
 The currency failed to find support early in the session --
after the central bank raised interest rates 25 basis points to
0.75 percent -- largely because the bank warned the economic
recovery at home and abroad will be slower than thought,
foreshadowing a more hesitant pace of rate hikes from now on.
 Canada's blistering growth rate and jobs growth had led
primary securities dealers to unanimously predict Tuesday's
rate hike, which put Canada leagues ahead of the U.S. Federal
Reserve and other G7 central banks that are not yet ready to
end the era of easy money.
 "We were a bit surprised by the fact that they did not
address the strength of the labor market. Actually, we are the
only G7 country where the employment level is now around its
pre-recession one," said Yanick Desnoyers, economist at
National Bank Financial in Montreal.
 "There was a lack of conviction clearly in this press
release ... but we still think that domestic developments
should be strong enough going forward."
 Canada's primary securities dealers forecast unanimously on
Tuesday that the Bank of Canada will raise interest rates for a
third time this year in September, but most expect a pause in
the credit tightening cycle sometime in the fourth quarter.
 Canadian government bond prices erased earlier gains as a
steep late-afternoon rally in North American equities put
riskier assets back in favor.
 Second thoughts about the Bank of Canada's statement
earlier in the day also weighed.
 "Ultimately given that it wasn't as much of a deviation as
maybe people had feared that when you get back to the business
of the risk trade then that was a more important dynamic over
the the afternoon," said TD's Tulk.
 Canada's two-year bond CA2YT=RR slipped 8 Canadian cents
to yield 1.578 percent, while the 10-year bond CA10YT=RR fell
30 Canadian cents to yield 3.202 percent.
 Canadian bonds underperformed U.S. Treasuries across the
curve. The Canadian 10-year bond was 24.8 basis points above
the comparable U.S. bond, compared with 20.4 basis points in
the previous session.
 (Editing by Peter Galloway)