CANADA FX DEBT-C$ down as weak data supports more rate cuts

Fri Jan 23, 2009 10:01am EST
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 * Inflation data supports call for March rate cut
 * C$ shaken overnight by drop in oil prices
 * Bonds pinned lower along with U.S. Treasuries
 By Frank Pingue
 TORONTO, Jan 23 (Reuters) - The Canadian dollar fell versus
the U.S. dollar on Friday morning as the latest Canadian
inflation data supported predictions for more Bank of Canada
interest rate cuts, while prices for oil, a key Canadian
export, turned lower.
 Canadian bond prices took their cue from the bigger U.S.
Treasury market and were lower across the curve due to concerns
about heavy supply of government paper in the United States.
 At 9:45 a.m. (1445 GMT), the Canadian unit was at C$1.2589
to the U.S. dollar, or 79.43 U.S. cents, down from C$1.2537 to
the U.S. dollar, or 79.76 U.S. cents, at Thursday's close.
 Earlier, it had fallen as low as C$1.2652 to the U .S.
dollar, or 79.04 U.S. cents.
 A good portion of the Canadian currency's drop followed a
report that showed Canada's inflation rate eased in December,
which increased the likelihood that the Bank of Canada will cut
its key rate below 1.00 percent in March.
 But the currency had already been falling during the
overnight session due to a combination of lower prices for key
Canadian exports such as oil, and demand for the U.S. dollar
given its reputation for being a safe-haven play.
 "The inflation numbers were unambiguously weak, softer than
the market expected and I have to think contributing to the
weaker Canadian dollar," said Eric Lascelles, chief economics
and rates strategist at TD Securities.
 "You've also got significant weakness in some of the other
commodity players out there and a lot of strength in the U.S.
dollar, so there are clearly other forces out there as well."
 The Canadian dollar was up as much as 3.6 percent at one
point earlier in the year as Middle East tensions help lift
commodity prices.
 But a turnaround in those prices and a string of weak data
have left the currency down 3.1 percent on the year and not far
off a seven-week low.
 With the latest key piece of data now out of the way, it
appears that next week's annual budget from the Conservative
government stands as the next item to weight on the Canadian
 A report on Thursday said Canada will post C$64 billion in
deficits over the next two fiscal years to stimulate a flagging
economy but will return to surplus in five years.
 "Markets are already steeled to the expectation that there
will be some pretty substantial deficits," Lascelles said.
 "The market has a good handle of the magnitude of that
situation and I don't expect the Canadian dollar to get a whole
lot weaker, but that is probably the risk over the near term."
 Lascelles said he expects the Canadian currency will likely
attract buyers whenever it nears the C$1.30 level just at it
did when it nears the level in November and December.
 Canadian bond prices were all lower as dealers fretted over
the impact of large amounts of new debt in the United States
that are expected in the coming years, but a slide in equity
markets at the open helped to cushion the drop in prices for
government debt.
 "Investors are worried about the (U.S.) government's
mounting obligations, so I think it's generally concern about
supply and the government's growing debt," said Sal Guatieri,
senior economist at BMO Capital Markets.
 The two-year bond was down 13 Canadian cents at C$102.78 to
yield 1.220 percent, while the 10-year bond fell 23 Canadian
cents to C$112.02 to yield 2.780 percent.
 The 30-year bond was down 5 Canadian cents at C$124.35 to
yield 3.619 percent. In the United States, the 30-year Treasury
yielded 3.3528 percent.
 (Editing by Peter Galloway)