CANADA FX DEBT-C$ rises slightly in thin markets

Mon Dec 22, 2008 5:08pm EST
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 * Canada dollar rises 0.3 percent
 * Currency trims early gains as oil retreats
 * Bond prices mixed, weak on long end
 By Cameron French
 TORONTO, Dec 22 (Reuters) - The Canadian dollar closed
slightly higher versus the U.S. dollar on Monday, trimming
early gains as oil prices declined, while light trading volumes
led to wide swings as investors pushed through end-of-year
 Bond prices ended mixed but fairly flat, with long end
maturities retreating.
 The currency closed at C$1.2190 to the U.S. dollar, or
82.03 U.S. cents, up from C$1.2230 to the U.S. dollar, or 81.77
U.S. cents, at Friday's close.
 An early rise in oil prices helped the Canadian dollar to a
session high of 83.44 U.S. cents, but the gains mostly
evaporated as oil prices eased to end 6 percent lower.
 The currency still held on to some of the advance, however,
as tight volumes led to sharp moves on small transactions,
obscuring the impact of fundamental news.
 "The volatility's so high and the liquidity's so low that
it's an absolutely deadly combination for anybody trying to put
through some volume in the markets," said Steven Butler,
director of foreign exchange trading at Scotia Capital in
 A C$4 billion Canadian auto industry bailout plan announced
on Saturday as well as reports of an agreement between the
country's government and banks on a C$32 billion restructuring
plan for the frozen asset-backed commercial paper market, had
little if any impact on the currency, he said.
 The currency has strengthened fairly steadily over the
greenback in the past two weeks, particularly as the U.S.
Federal Reserve cut its key interest rate almost to zero last
week, reducing the yield on U.S. debt investments.
 Butler said he expects the Canadian dollar to rise versus
the U.S. currency, although the longer-term direction will not
really be clear until normal market volumes return in January.
 Canadian bonds ended mixed, with longer maturities
following the lead of weaker U.S. Treasuries, while two-year
bonds rose on expectations of more interest rate cuts and
weaker stock prices.
 Canada's debt market often follows the lead of its larger
neighbor when there's little domestic economic news. Treasuries
eased as a record size auction of two-year notes added to fears
that new debt supply could dilute the market.
 Canadian bond yields are around their lowest levels in more
than a decade as recession fears have driven investors to
liquidate stock and commodity holdings and shift their funds
into safe-haven debt.
 The two-year bond rose 5 Canadian cents to C$102.89 to
yield 1.235 percent. The 10-year slid 10 Canadian cents to
C$111.85 to yield 2.810 percent.
 The yield spread between the two-year and 10-year bond was
at 156 basis points, up from 153.4 basis points at the previous
 The 30-year bond fell 35 Canadian cents to C$127.55 to
yield 3.468 percent. In the United States, the 30-year Treasury
yielded 2.616 percent.
 (Reporting by Cameron French; editing by Peter Galloway)