CANADA FX DEBT-Libya uprising puts C$ in a tight range

Wed Feb 23, 2011 4:39pm EST
 
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 * C$ closes at C$0.9886 vs US$, or $1.0115
 * Bond prices mostly creep higher
 (Updates to close, adds details, quotes)
 By Claire Sibonney
 TORONTO, Feb 23 (Reuters) - Canada's commodity-driven
currency was little changed against the U.S. dollar on
Wednesday as investors weighed market fears over Libya's
violent uprising against a surge in oil prices.
 U.S. crude prices surged to a 28-month high of $100 a
barrel as the revolt in OPEC producer Libya caused a cut in
output there and investors bet the unrest could spread to other
oil exporters in the region. [O/R]
 Stronger crude prices typically help the Canadian dollar as
Canada is a significant oil exporter. But rising oil prices
have also fanned concerns that they could inspire inflation,
which might hamper global economic recovery.
 "Canada is flat. We're struggling between the jump higher
in risk aversion over the last couple days versus the jump
higher in oil prices," said Camilla Sutton, chief currency
strategist at Scotia Capital.
 U.S. stocks tumbled for a second day on Wednesday as the
spike in oil drove investors to seek safer-haven assets and
fueled worries of a market correction. [.N]
 "Markets are really just trying to digest what higher oil
prices mean," Sutton said. "Is it good for Canada in the sense
that it brings in more revenues to the West and oil exporting
provinces or is it actually negative in the sense that it
weighs on the fragile U.S. recovery?"
 The dramatic rally in oil dragged broadly on the U.S.
dollar as higher energy costs tend to ripple through the
economy, pushing up the costs of utilities, manufactured goods
and transportation.
 As investors shunned the greenback, another safe-haven
currency, the Swiss franc, neared a record high, while the euro
and sterling also rose on the back of heightened expectations
that interest rates will rise faster in the euro zone than in
the United States. [FRX/]
 The Canadian dollar CAD=D4 finished at C$0.9886 to the
U.S. dollar, or $1.0115, slightly up from Tuesday's North
American session close at C$0.9909 to the U.S. dollar, or
$1.0092. During the day, the currency slipped as low as
C$0.9960 to the U.S. dollar, or $1.0040, its weakest point
since Feb. 11.
 Sutton said that weakness was partly driven by rumors of
merger and acquisition activity that could be negative for the
Canadian currency.
 She said the next immediate range for the Canadian dollar
should be close to Wednesday's overall move between C$0.9858 to
C$0.9960.
 No major Canadian data is scheduled for the rest of the
week.
 REAL RETURN ATTRACTS STRONG DEMAND
 Canadian government bonds mostly turned higher after an
early bout of profit-taking, as the turmoil in Libya fanned
fears of inflation spurred by expensive oil, and its potential
drag on the global recovery.
 "There is residual pessimism and there's still a lot of
volatility left underneath the surface and this hasn't been
resolved on the geopolitical front," said David Tulk, chief
macro strategist at TD Securities.
 "That fear has come back to markets so you're seeing the
usual dynamic where bonds are catching a bit of a bid, equities
are weaker and then the fear trade is showing up in the price
of oil as well."
 The interest-rate sensitive two-year Canadian government
bond CA2YT=RR was off 1 Canadian cent to yield 1.802 percent,
but the 10-year bond CA10YT=RR gained 28 Canadian cents to
yield 3.323 percent.
 Canada's auction of 30-year real return bonds on Wednesday
met with the strongest demand since December 2009.
[ID:nN23171025]
 In other debt issues, the Province of Ontario sold C$750
million in a reopening of an existing issue that was 69 basis
points more than the Canadian government benchmark, according
to a term sheet seen by Reuters. [ID:nN23149273]
 (Additional reporting by Ka Yan Ng; editing by Peter
Galloway)