August 25, 2008 / 8:33 PM / 9 years ago

Canadian dollar takes a hit from weak equities

TORONTO (Reuters) - The Canadian dollar slipped against the U.S. dollar in lackluster trading on Monday, as equity markets tumbled on credit market fears, lessening the appeal of North American assets and the demand for Canadian dollars to buy them.

Domestic bond prices, with no Canadian data to key off, rose as investors bought safe haven government debt in response to the falling stock markets.

The Canadian dollar closed at C$1.0509 to the U.S. dollar, or 95.16 U.S. cents, down from C$1.0486 to the U.S. dollar, or 95.37 U.S. cents, at Friday's close.

The currency stayed in a fairly tight range of C$1.0440 and C$1.0515, even while trading was thin, due to a market holiday in Britain, which tends to amplify moves.

"We're seeing some intraday trading, but a real reluctance to take the market in a trend-like direction," said Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco.

A negative tone in North American equity markets hurt the Canadian dollar, as financials sold off on both sides of the border on credit market fears, and the heavyweight energy sector of the Toronto Stock Exchange fell as oil prices fluctuated.

The currency had been higher against the greenback early on in the session, rising with oil prices, but its gains proved short-lived as U.S. crude oil CLc1 had a bit of a roller-coaster session, with its price moving from slightly positive to negative and back again.

Canada's oil sands contain the biggest deposit of crude outside the Middle East. Canada is also the biggest supplier of oil to the United States.

This week will be a quiet one for domestic data, with the main event coming on Friday, when gross domestic product for the second quarter will be released. That will also be the last major piece of data before the Bank of Canada makes its September 3 rate announcement.

Bank of Canada Deputy Governor David Longworth will give a speech on Tuesday in Kingston, Ontario, on the central bank's response to financial turbulence.

BOND PRICES RISE

Bond prices rose as investors responded to the slide in stock markets by buying safe haven government debt, said Sheldon Dong, fixed income strategist at TD Securities.

Dong said the rally was exaggerated due to illiquid conditions caused by the market holiday in Britain, a slightly shortened trading week (the Canadian bond market will be closed by noon on Friday ahead of the Labor Day long weekend), and month-end conditions.

The two-year bond rose 11 Canadian cents to C$99.71 to yield 2.883 percent. The 10-year bond added 38 Canadian cents to C$105.55 to yield 3.571 percent.

The yield spread between the two-year and 10-year bond was 68.9 basis points, up from 63.4 at the previous close.

The 30-year bond climbed 56 Canadian cents to C$116.51 for a yield of 4.025 percent. In the United States, the 30-year treasury yielded 4.393 percent.

The three-month when-issued T-bill yielded 2.52 percent unchanged from the previous close.

Editing by Rob Wilson

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