March 24, 2009 / 9:19 PM / 8 years ago

CANADA FX DEBT-C$ falls as risk appetite fades, bonds drop

* Canadian dollar off 6-week high as risk appetite wanes

* Bonds fall hard, miss out on rally in Treasuries (Updates to close)

TORONTO, March 24 (Reuters) - The Canadian dollar dropped against a broadly stronger U.S. dollar on Tuesday as appetite for risk declined along with falling stock markets.

With little economic news to drive the currency this week, movement is likely to be directed by equity and commodity markets, analysts said.

North American equity markets finished lower on Tuesday, a day after a big rally that was driven partly by news of a U.S. plan to help rid banks of toxic assets. As optimism about that plan faded on Tuesday, the U.S. dollar rose as its safe-haven appeal increased. [ID:nN24530004]

The Canadian currency closed at C$1.2318 to the U.S. dollar, or 81.18 U.S. cents, down from C$1.2225 to the U.S. dollar, or 81.80 U.S. cents, at Monday's close.

"I think you have to view the Canadian dollar in a global context today, which is to say you've got a strong U.S. dollar," said Eric Lascelles, chief economics and rates strategist at TD Securities. "Most other players, barring the pound have been pretty weak, so Canada is looking pretty respectable compared to other commodity players, the euro."

A retest of the Canadian dollar's six-week high around the C$1.22 level, hit on Monday, is not out of the question. The currency is now well off the 4-1/2 year low hit two weeks ago, partly because the economic outlook has improved recently as statistics have not been as dire as feared.

"From a positional standpoint, people want to play dollar/Canada from the short side," said George Davis, chief FX technical analyst at RBC Capital Markets.

"I think people are going to view these (U.S. dollar) rallies as another selling opportunity. If we get up to C$1.2290 and C$1.2380, we'll probably see people look to put on some short positions looking for another attempt to break below C$1.22 again."

BONDS SLIP

Canadian government bonds normally follow the lead of the much bigger U.S. Treasury market, but on Tuesday they were unable to join Treasuries in a rally after the U.S. Federal Reserve announced that 30-year bonds would be included in its plan to buy Treasuries.

The U.S. long bond surged on the news, but Canada's 30-year bond and other maturities were firmly lower.

"Yields are wafting higher but there isn't all that much specific to pin Canada's fortunes on," Lascelles said.

He attributed some of the fall to concerns that too much supply is coming to market.

The two-year bond fell 11 Canadian cents to C$100.15 to yield 1.18 percent. The 10-year bond fell C$1.15 to C$107.45 to yield 2.899 percent.

The 30-year bond fell C$1.45 to C$122.90 to yield 3.687 percent. The U.S. 30-year bond yielded 3.645 percent.

Canada bonds underperformed across the curve. The 30-year bond yield was 4.2 basis points above that of its U.S. counterpart, compared with 7.6 basis points below on Monday. (Reporting by Ka Yan Ng; editing by Peter Galloway)

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