February 25, 2009 / 9:33 PM / 9 years ago

CORRECTED - CANADA FX DEBT-C$ drops as M&A news triggers selloff

(Corrects figure in the second paragraph to U.S. dollars from Canadian, to $3.6 billion from C$3.6 billion)

* C$ rattled by news of Agrium’s planned takeover

* Currency slide extends in aftermath of weak U.S. data

* Bond prices extend Tuesday slide on supply concerns (Recasts with comments and closing numbers)

By Frank Pingue

TORONTO, Feb 25 (Reuters) - The Canadian dollar skidded lower on Wednesday as soft U.S. economic data fueled risk aversion trades while a Canadian-led corporate takeover upped the likelihood of increased demand for U.S. dollars.

The bulk of the Canadian currency’s 0.9 percent fall came early in the session after Canadian fertilizer company Agrium Inc (AGU.TO) launched a $3.6 billion cash and stock offer to buy CF Industries (CF.N) of the United States. [ID:N25476074]

The Canadian dollar fell further as the greenback rose on its safe-haven status after data showed the pace of existing home sales in the United States fell in January, while economists had expected a rise. [ID:nLP680404]

“There was the M&A deal that got announced midmorning and that really took the sting out of the Canadian dollar and we saw it tumble quite a bit,” said Steve Butler, director of foreign exchange trading at Scotia Capital.

“And it’s getting close to the time when there is month-end and a lot of portfolios need to be rebalanced. And with the way equities have been performing this month it looks like the U.S. dollar is going to be wanted for that rebalancing.”

The Canadian dollar fell as low as C$1.2614 to the U.S. dollar, or 79.28 U.S. cents, down sharply from an overnight high of C$1.2398 to the U.S. dollar, or 80.66 U.S. cents.

It recovered slightly and closed at C$1.2546, or 79.71 U.S. cents, which was still down from C$1.2433, or 80.43 U.S. cents, at Tuesday’s close.

The Agrium news was a drag on the Canadian dollar because the company will need to come up with U.S. dollars to finance a portion of the transaction if it eventually goes through.

Helping to cushion the commodity-linked Canadian dollar’s slide was a 6 percent rise in oil prices to above $42 a barrel, which extended a 4 percent rally in the previous session.

Still, the move in the Canadian currency did not draw much concern among traders as it came on the heels of a 0.6 percent rally in the previous session, when North American equities surged and the price of oil, a key Canadian export, rose.

Also, some traders said the Canadian currency may get a boost later this week as Canadian banks continue to announce quarterly earnings. The banks stand to benefit from comparison with problem-plagued U.S. banks, they said.

“Given that Canadian banks still generally appear to be performing quite well relative to the banking sector in the rest of the world, it does highlight one of the positive facets of the Canadian dollar at the moment,” said Adam Cole, global head of foreign exchange trading at RBC Capital Markets in London.

Toronto-Dominion Bank (TD.TO) kicked off the Canadian bank reporting season with a smaller-than-expected drop in quarterly profit, a result that some experts say bodes well for the other Canadian banks still to report. [ID:N25325226]

BONDS PRICES KNOCKED DOWN

Canadian bond prices extended their slide from the previous session as North American stocks finished comfortably off their session lows, curbing investor appetite for government debt.

Toronto’s key stock index rebounded to close 0.93 percent higher after being down as much 1.3 percent earlier in the day, while the Dow Jones industrial average ended down 1 percent after being down 2.6 percent earlier in the day.

The next data due out in Canada will be Friday’s current account balance for the fourth quarter. The data is expected to show Canada had a current account deficit of C$4.85 billion.

But the current account data is not expected to have a huge impact on Canada’s bond market as it will be followed by gross domestic product figures on Monday, which are expected to show the Canadian economy shrank during the fourth quarter of 2008.

That will be followed by the Bank of Canada’s interest rate announcement on March 3, when some expect the central bank to cut its key interest rate by a half point to 0.50 percent.

The interest-rate sensitive two-year bond dropped 12 Canadian cents to C$102.58 to yield 1.262 percent, while the 10-year bond dropped 77 Canadian cents to C$110.43 to yield 2.953 percent.

The 30-year bond shed C$1.70 to C$122.95 to yield 3.686 percent.

Canadian bonds outperformed U.S. Treasuries across most of the curve. The Canadian 30-year bond yield was 9.70 basis points above its U.S. counterpart, compared with 11.5 basis points on Tuesday. (Editing by Peter Galloway)

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