CANADA FX DEBT-C$ advances, bonds fall, as risk sentiment up

Wed May 26, 2010 8:28am EDT
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   * Canadian dollar at 93.98 U.S. cents
 * Bonds fall sharply in safe haven exit
 By Ka Yan Ng
 TORONTO, May 26 (Reuters) - The Canadian dollar rose
against the U.S. currency on Wednesday as riskier assets came
back in favor, recovering from its weakest level in nearly
seven months.
 Improving risk sentiment sent Canadian government bond
prices lower across the curve.
 After clawing back ground from deep losses the previous
session, North American stock indexes looked set to rise, with
U.S. stock index futures rising as U.S. Treasury Secretary
Timothy Geithner flew to Europe to press for united action to
tackle the region's deepening debt crisis. [.N][ID:nSGE64P04M]
 The commodity-laden main stock index in Toronto appeared
poised for gains as well, as the the price of oil, a key
Canadian export, rose nearly 3 percent, lending support to the
Canadian dollar.  [.TO]
 "I think everybody is going to be glued to the equities
again today," said Steve Butler, director of foreign exchange
trading at Scotia Capital.
 At 8:05 a.m. (1205 GMT), the Canadian dollar was at
C$1.0640 to the U.S. dollar, or 93.98 U.S. cents, up from
Tuesday's close at C$1.0700 to the U.S. dollar, or 93.46 U.S.
 In the previous session, the Canadian dollar sagged to its
lowest mark in almost seven months in a broad global sell-off
 of riskier assets, amid growing concern about Europe's debt
crisis and the prospect of a Korean military conflict.
 The recent volatility afflicting financial markets spurred
debate whether the Bank of Canada will start raising interest
rates on June 1, its next scheduled policy setting meeting.
 But some say a rate increase would remove the emergency
nature of the current ultralow overnight rate at 0.25 percent.
 "I don't want them to hike rates, I want them to normalize
rates. I think that's a big difference. The crisis certainly in
Canada that was supposed to be, never really was and I think
that they'd be much better off if they normalized rates when
they can," said Butler.
 The expectations of a central bank rate increase, reflected
in yields on overnight index swaps, are tilted slightly toward
no change in Canadian interest rates next week.
 The expectations of an increase have fallen hard from April
20 when the Bank of Canada removed its conditional commitment
to hold rates at record lows until June. BOCWATCH
 The two-year government bond CA2YT=RR fell 12 Canadian
cents to C$99.72 to yield 1.645 percent, while the 10-year bond
CA10YT=RR lost 40 Canadian cents to C$101.68 to yield 3.302
 (Reporting by Ka Yan Ng; Editing by Theodore d'Afflisio)