CANADA FX DEBT-C$ ends lower as BoC warns on currency strength

Tue Aug 25, 2009 4:32pm EDT
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 * Closes at C$1.0858 to the US$, or 92.09 U.S. cents
 * Stumble in oil prices also weighs on C$
 * Upbeat U.S. data lends support to greenback
 (Updates to session close)
 By Frank Pingue
 TORONTO, Aug 25 (Reuters) - The Canadian dollar closed
lower on Tuesday as oil prices skidded from a 10-month peak
while a Bank of Canada official warned that the currency's
strength could hurt the nation's economic recovery.
 The slide in the currency halted a five-day rally that
extended into the early parts of Tuesday's session, when it
reached its highest level in nearly three weeks.
 But the momentum was short-lived and the selling picked up
steam after Bank of Canada Deputy Governor Timothy Lane sounded
a warning that persistent Canadian dollar strength was threat
to the economic recovery. [ID:nN25220089]
 After Lane's speech, the currency skidded as low as
C$1.0870 to the U.S. dollar, or 91.99 U.S. cents, down from a
session high of C$1.0718 to the U.S. dollar, or 93.30 U.S.
cents, its highest point since Aug. 6.
 "The market got a bit extended in the morning as equities
opened up stronger, then it looked like the herd got caught the
wrong way and everything turned around," said Steve Butler,
director of foreign exchange trading at Scotia Capital.
 "But I certainly do think the big news for Canada today was
another warning shot from the Bank of Canada. I think that the
market's got to be careful about doing too much to try and take
them on because I think they have been pretty adamant about the
fact that they are watching the currency closely," Butler
 In his speech to economists, Lane said Canada's recession
had most likely ended, with growth expected to resume in the
third quarter. But he also said that a persistently strong
Canadian dollar would reduce real growth and delay the return
of inflation to target.
 The Canadian dollar closed at C$1.0858 to the U.S. dollar,
or 92.09 U.S. cents, down from C$1.0770 to the U.S. dollar, or
92.85 U.S. cents, at Monday's close.
 The currency also came under pressure as oil prices staged
a 3 percent fall after earlier hitting a 10-month peak
[ID:nSP347579]. As a major energy producer and exporter, Canada
often sees its currency influenced by oil price swings.
 The early turnaround in the Canadian dollar followed data
that showed larger than expected improvements in U.S. housing
prices and consumer confidence, which lent new weight to signs
the U.S. economy is emerging from its longest and deepest
recession since the 1930s. [ID:nN25205751]
 The upbeat data lent an immediate boost to the greenback, a
departure from earlier this year when positive news opened the
door to Canadian dollar gains as investors decided to sell
safe-haven currencies like the U.S. dollar.
 The greenback's ability to hold firm after a tendency by
traders to sell it for higher-yielding currencies on the back
of strong economic data reflected more normalized markets.
 Canadian bond prices, with no domestic economic data to
consider, followed the bigger U.S. Treasury market to a higher
close as decent demand there for an auction of two-year notes
offset the impact of the upbeat U.S. data.
 Bond prices had all been lower across the curve earlier in
the session when the U.S. data sapped demand for more secure
assets like government debt and prompted a move into riskier
assets like stocks.
 The two-year bond CA2YT=RR rose 6 Canadian cents to
C$99.43 to yield 1.288 percent, while the 10-year bond
CA10YT=RR rose 30 Canadian cents to C$102.90 to yield 3.398
 The 30-year bond CA30YT=RR ended up 25 Canadian cents at
C$118.55 to yield 3.900 percent.
 Canadian bonds underperformed their U.S. counterparts
across most of the curve. The Canadian 30-year bond was 32.1
basis points below the U.S. 30-year yield, versus 35.2 basis
points on Monday.
 (Editing by Rob Wilson)