January 23, 2008 / 2:35 PM / 10 years ago

Loonie flat but could be set for more losses

<p>Newly pressed Canadian one dollar coins, also know as loonies, at the Royal Canadian Mint in Winnipeg on November 14, 2007.Fred Greenslade</p>

TORONTO (Reuters) - The Canadian dollar was flat versus the U.S. dollar on Wednesday as equity markets looked ripe for another rough session while nagging concerns about global growth weighed on commodity prices.

Domestic bond prices rose across the curve as investors were lured by the safety offered by government debt amid talk of more interest rate cuts in Canada and the United States.

At 9:20 a.m., the Canadian unit was at C$1.0277 to the U.S. dollar, or 97.30 U.S. cents, up from C$1.0281 to the U.S. dollar, or 97.27 U.S. cents, at Tuesday's close.

Concerns that a weak U.S. economy could lead to a global economic slowdown shook commodity prices and kept the Canadian dollar from pushing higher given the nature of commodities that Canada produces.

Helping to support the Canadian dollar is the favorable Canada-U.S. interest-rate gap after an emergency interest rate cut by the U.S. Federal Reserve on Tuesday that was followed by a smaller cut by the Bank of Canada.

"There's a little bit of a tug-of-war for the Canadian dollar between rising rate spreads... and declining commodity prices," said Doug Porter, deputy chief economist at BMO Capital Markets. "I think ultimately lower commodity prices are going to win the day and undercut the (Canadian) currency."

And with equity markets being used as a barometer for the economy, the Canadian dollar could face additional pressure if stock markets tumble amid fears of more write-downs at U.S. banks and worries about a U.S. recession.

Porter also suggested a drop in Canada's composite leading indicator by 0.1 percent in December, which extended a rather steady string of weak domestic economic data, did not help the Canadian dollar.

"There's been a fairly hefty smattering of downbeat Canadian indicators that's weighing a bit on the currency," said Porter. "But the much bigger story here is ongoing concerns about the health of the global economy and what that means for commodity prices."

BONDS RALLY

Bond prices bounced back and were higher across the curve as jittery investors rushed into more secure assets given the talk of additional rate cuts.

Several experts suggested the Bank of Canada was caught flat-footed by the Fed's emergency rate cut and that it may consider cutting its key overnight rate ahead of its next scheduled rate-setting date of March 4.

On top of that, the Fed could also lower its key rate again next week at its scheduled two-day meeting January 29-30.

The Bank of Canada's key overnight rate is 4.00 percent, compared with the Fed's rate of 3.50 percent.

"It seems the Bank (of Canada) was caught a little flat-footed yesterday and may be more aggressive the next time out," said Porter. "And if conditions deteriorate enough they may move inter-meeting."

The overnight Canadian Libor rate was at 4.0500, percent, down from 4.0900 percent on Tuesday.

Tuesday's CORRA rate was 4.0062 percent, down from 4.2483 on Monday. The Bank of Canada published the previous day's rate at around 9:00 a.m. daily.

The two-year bond was up 14 Canadian cents at C$102.18 to yield 3.026 percent. The 10-year bond rose 37 Canadian cents to C$101.96 to yield 3.749 percent.

The yield spread between the two-year and 10-year bond was 72.3 basis points, up from 69.1 points at the previous close.

The 30-year bond increased 24 Canadian cents to C$114.88 to yield 4.121 percent. In the United States, the 30-year Treasury yielded 4.119 percent.

The three-month when-issued T-bill yielded 3.40 percent, down from 3.45 percent at the previous close.

Editing by Renato Andrade

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