March 25, 2009 / 8:57 PM / in 9 years

CANADA FX DEBT-C$ gains on Geithner remarks, bonds fall

* Canadian dollar up as Geithner’s comments hit greenback

* C$ still relatively range-bound

* Bonds fall on failed gilts auction, weak demand in US (Updates to close)

By Ka Yan Ng

TORONTO, March 25 (Reuters) - The Canadian dollar finished higher against the the U.S. currency on Wednesday as the greenback was undercut by comments from U.S. Treasury Secretary Timothy Geithner.

The flight-to-safety appeal of the U.S. dollar was also hurt by better-than-expected U.S. durable goods orders for February and a jump in new home sales. [ID:nLP953349]

But Geithner’s comments were the main catalyst that drew the U.S. dollar into a volatile spin as he expressed openness to expanded use of an IMF currency basket, which would include the dollar, euros, sterling and yen.

The U.S. dollar recouped some of its losses after Geithner reiterated that the greenback would remain the world’s reserve currency for a long time. [ID:nN25418099]

The Canadian currency finished at C$1.2285 to the U.S. dollar, or 81.40 U.S. cents, up from C$1.2318 to the U.S. dollar, or 81.18 U.S. cents, at Tuesday’s close.

Mark Chandler of RBC Capital Markets said the Canadian dollar’s move higher was mostly based on a “misinterpretation of Geithner’s remarks that led to broad U.S. dollar weakness.”

The Canadian dollar reached a peak at C$1.2219 to the U.S. dollar, or 81.84 U.S. cents, before unwinding some of those gains as Geithner’s remarks were reanalyzed and stock markets turned negative in the afternoon.

The currency has taken cues on direction from equity and commodity markets lately, considering them a barometer of risk sentiment.

Despite the weaker U.S. dollar, however, the Canadian currency stayed in the same C$1.22-C$1.24 range it has been in all week.

“Currencies were jumping around on Geithner’s comments,” said Shane Enright, currency strategist at CIBC World Markets.

“In general though, we haven’t really deviated far from the levels we saw yesterday. We’re still very much in familiar territory. The C$1.22 level seems to be key short-term (U.S. dollar) support here and today we haven’t really seriously threatened that.”

BONDS FALL

Canadian government bonds stayed in negative territory, even as stocks turned lower, as growing debt supply met with concern and apprehension about the success of auctions mounted.

Britain suffered its first failed government bond auction since 2002 after bids fell more than 100 million pounds short of the 1.75 billion pounds the government was trying to raise. [ID:nLP456926]

In turn, that dragged on demand for the U.S. five-year note auction, while a large purchase of government debt by the U.S. Federal Reserve had limited impact.

“The dominant theme was the U.K. failed auction and that put a bit of a scare in bond markets everywhere. There was also a sloppy five-year auction in the U.S.,” said Chandler, a fixed income strategist at RBC.

The New York Federal Reserve bought $7.5 billion in longer-dated Treasury securities whose maturities range from 2016 to 2019, part of the U.S. central bank’s program to help lower long-term borrowing costs. [ID:nNYE000537]

The two-year bond fell 7 Canadian cents to C$100.08 to yield 1.212 percent. The 10-year bond slid 57 Canadian cents to C$106.88 to yield 2.961 percent.

The 30-year bond dropped 80 Canadian cents to C$122.05 to yield 3.729 percent. The U.S. 30-year bond yielded 3.734 percent.

Canada bonds outperformed across much of the curve. The 30-year bond yield was 0.5 basis points below its U.S. counterpart, compared with 5.4 basis points on Tuesday. (Reporting by Ka Yan Ng; editing by Peter Galloway)

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