January 23, 2008 / 10:30 PM / 10 years ago

Canadian dollar rises with equities

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

TORONTO (Reuters) - The Canadian dollar climbed against the U.S. dollar on Wednesday, in a day of whippy trading that saw North American equity markets comeback from steep losses, boosting sentiment for the commodities-based currency.

Domestic bond prices fell as investors reacted to the equities rebound.

The Canadian currency closed at C$1.0236 to the U.S. dollar, or 97.69 U.S. cents, up from C$1.0281 to the U.S. dollar, or 97.27 U.S. cents, at Tuesday’s close.

The currency spent most of the session lower against the greenback, as North American stock markets suffered steep losses early on due to fears of a U.S. recession.

But an end-of-session turn around in equities gave the Canadian dollar some traction.

The Toronto Stock Exchange erased a 400 point loss as financials rallied amid talk of a bailout for U.S. bond insurers.

Stock markets have been viewed as a barometer of the economy, and the fears that a possible U.S. recession could slow the global economy and clip commodity prices have hurt the Canadian dollar.

Canada is a major producer and exporter of many key commodities, such as oil, base metals, and timber.

Another factor in the Canadian dollar’s rise is a favorable interest rate differential between Canada and the United States.

The U.S. Federal Reserve surprised markets on Tuesday by slashing its key lending rate by 75 basis points to 3.5 percent, a week before its scheduled policy meeting.

The Bank of Canada also cut its key lending rate, but by a milder 25 basis points, to 4 percent.

Many analysts see the spread widening further.

“Working in favor of the Canadian dollar are increasing expectations that the Fed easing will be much more aggressive that thought one or two months ago,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.

Strauss said he anticipates the Fed will ease by another one-and-a-half percentage points, to 2 percent by the middle of the year, as it tries to stimulate economic growth.

“Where as on the Canadian side, given the strength of the domestic economy, it’s clear that there is no need at this point for the Bank of Canada to move as aggressively as the Fed, and therefore, although they will cut rates, the spread between Canada and the U.S. will continue to widen in favor of the Canadian dollar.”

BONDS TUMBLE

Canadian bond prices tumbled in response to the rallies on Bay Street and Wall Street.

“People are buying bonds these days in a safe-haven play, so as people’s confidence in the stock market goes up, they are going to unwind some of that flight to quality trade,” said Sheldon Dong, fixed income specialist at TD Waterhouse Private Investment.

The two-year bond slid 17 Canadian cents to C$101.87 to yield 3.198 percent. The 10-year bond fell 64 Canadian cents to C$100.95 to yield 3.877 percent.

The yield spread between the two-year and 10-year bond was 67.9 basis points, down from 69.1 points at the previous close.

The 30-year bond dove 89 Canadian cents to C$113.75 to yield 4.182 percent. In the United States, the 30-year Treasury yielded 4.309 percent.

The three-month when-issued T-bill yielded 3.41 percent, down from 3.45 percent at the previous close.

Editing by Renato Andrade

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