CANADA FX DEBT-C$ revisits 2011 high, recent oil runup supports

Thu Feb 24, 2011 5:09pm EST
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 * C$ closes at C$0.9832 vs US$, or $1.0171
 * C$ retests highest level since March 2008
 * Bond prices firm as investors eye Libya revolt
 (Updates to close, adds details, quotes)
 By Claire Sibonney
 TORONTO, Feb 24 (Reuters) - Canada's dollar revisited its
2011 high against the U.S. currency on Thursday, supported by
oil's rise since the revolt in Libya started and prospect
higher energy prices could spur tighter Canadian monetary
 The country's commodity-linked currency returned to its
loftiest level in nearly three years even though oil pared
gains following Saudi Arabia's assurances it could fill any
Libyan supply shortfalls and unsubstantiated rumors Libyan
leader Muammar Gaddafi had been shot. [O/R]
 Michael Gregory, senior economist at BMO Capital Markets,
said the recent run-up in oil over Mideast tensions could still
be having a lingering positive impact, something the central
bank will weigh in its policy announcement on March 1.
 "Since Canada is a net oil exporter, this extra boost we're
going to get from higher oil prices specifically could provide
that little extra wealth in income spreading across the
country, and perhaps necessitate slightly more aggressive Bank
of Canada policy over the next little while," he said.
 A Reuters poll released on Thursday showed the central bank
is unanimously expected to remain on hold on Tuesday, with the
first interest rate hike of 2011 widely anticipated in May.
 John Curran, senior vice president at CanadianForex, noted
the currency's correlation to commodities has faded recently,
but the Canadian dollar should ultimately benefit if investors
see a sustained move higher in oil.
 "We're kind of at the right levels for the Canadian dollar.
... and I think people are going to be careful not just to
react to that one commodity," he said.
 The Canadian dollar also benefited from broader weakness in
the greenback on fears higher oil prices will hurt U.S.
consumer spending. [FRX/]
 "In other times, you've had a flight to safety bid to the
U.S. dollar that may have counteracted some of the positive
news on Canada but the U.S. dollar is struggling here," said
Mark Chandler, head of Canadian fixed income and currency
strategy at RBC Capital Markets.
  There was little other impetus to drive the Canadian
dollar on Thursday. The next major data is the December and
fourth-quarter read on economic growth on Monday, followed by
the Bank of Canada's policy setting decision on Tuesday.
 Pricing in that the Bank of Canada will hike rates again
long before the U.S. Federal Reserve, RBC said it expects the
Canadian dollar to meaningfully take out key resistance at
C$0.9837, on the way to reach C$0.96 by mid-year.
 The Canadian currency CAD=D4 ended at C$0.9832 to the
U.S. dollar, or $1.0171, up from Wednesday's North American
finish at C$0.9886 to the U.S. dollar, or $1.0115.
 It had reached as high as C$0.9816 to the U.S. dollar, or
$1.0187 -- a level it also hit on Feb. 17 -- which is the
strongest the currency has been since March 2008. If it breaks
this level, a run towards C$0.9800 may be in the cards,
analysts say.
 Canadian government bond prices edged higher across the
curve, following the broader move in U.S. Treasuries, as the
revolt in Libya spurred safe-haven demand.
 However the interest-rate sensitive short end of the curve
lagged due to uncertainty over the Bank of Canada's near term
path, said BMO's Gregory.
 The two-year Canadian government bond CA2YT=RR was flat
to yield 1.802 percent, while the 10-year bond CA10YT=RR
gained 7 Canadian cents to yield 3.319 percent.
 "The shock of oil prices could very well be from a global
perspective more negative for growth, perhaps more for the U.S.
than for inflation, so that's why the bond market has no
problem doing better today," he added.
 (Additional reporting by Ka Yan Ng; editing by Jeffrey