CANADA FX DEBT-C$ surges higher on renewed risk appetite

Thu May 27, 2010 4:25pm EDT
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   * C$ closes up at 95.24 U.S. cents
 * Oil tops $74 on equity rebound
 * Bond prices sink across the curve
 * Reuters poll calls for June rate hike
 (Updates to close; adds details, quotes)
 By Claire Sibonney
 TORONTO, May 27 (Reuters) - The Canadian dollar surged to
its highest level in a week against the U.S. currency on
Thursday as relieved investors returned to riskier assets after
China said Europe remains a key market for its foreign exchange
 The Canadian dollar shot up almost 2 U.S. cents, or nearly
2 percent, to hit a session high of C$1.0487 to the U.S.
dollar, or 95.36 U.S. cents, as oil topped $74 a barrel and
global stocks rallied sharply. [O/R] [.N] [.TO]
 "I think what we've seen is a dramatic reversal in risk
sentiment, triggered in large part by the denial of Chinese
officials overnight of the rumors that they were divesting
themselves of euro-denominated assets," said Millan Mulraine,
economics strategist at TD Securities.
 "That certainly helped the shift that we saw beginning
yesterday, with investors getting a better flavor for
increasing their appetite for risk."
 As a result, the euro, which in recent weeks has become a
proxy for risk appetite, surged across the board on the
comments from Beijing. [FRX/] [ID:nTOE64Q04P]
 The Canadian dollar CAD=D4 closed the North American
session at C$1.0500 to the U.S. dollar, or 95.24 U.S. cents,
decidedly higher than Wednesday's close at C$1.0686 to the U.S.
dollar, or 93.58 U.S. cents.
 Also buoying sentiment for the currency were rising
expectations that the Bank of Canada will hike rates on June 1,
with the market pricing in more than a 70 percent chance on
Thursday afternoon, compared with only about a 50 percent
chance on Wednesday. [BOCWATCH]
 In a Reuters poll released Thursday, all of Canada's
primary securities dealers and most other global forecasters
predicted the Bank of Canada will start raising interest rates
next week as the economy roars ahead. [ID:nTOR007523]
 "Our view is that they do hike rates because the Bank of
Canada has made it very, very clear that they don't lose focus,
and they focus on fundamentals, namely inflation," said Camilla
Sutton, a currency strategist at Scotia Capital.
 "That should help the Canadian dollar leading into it."
 Sutton said further support for the currency will be met at
the 200-day moving average of C$1.0479.
 Canadian bonds sank across the curve, tracking U.S.
Treasury notes, as renewed risk appetite dulled the traditional
safe-haven appeal of government debt. [US/]
 The two-year government bond CA2YT=RR dropped 33 Canadian
cents to C$99.42 to yield 1.796 percent, and the 10-year bond
CA10YT=RR plunged C$1.03 to C$101.05 to yield 3.375 percent.
 With a rate hike still being priced in the near term,
Canadian bonds lagged U.S. treasuries at the short end of the
curve but outperformed at the long end.
 Bond prices, particularly for near-term issues, typically
fall when interest rates go up as their fixed coupon payments
seem less profitable than rising yields on other investments.
 "Treasuries have rallied aggressively, they outperformed
Canadian bonds on the way up and now we're seeing a bit of a
reversal," added Mulraine.
 The Canadian 10-year bond was 2.7 basis points above the
U.S. 10-year yield, compared with 6.3 basis points above on
 In new issues, Ontario sold C$600 million of debt in a
reopening of an existing 4.60 percent bond, while Quebec sold
C$500 million of debt in a reopening of an existing 5.00
percent issue. [ID:nN27266731] [ID:nN27269894]
 (Reporting by Claire Sibonney; editing by Rob Wilson)