4 Min Read
* C$ firms to 95.02 U.S. cents
* Bernanke comments help revive demand for riskier assets
* Bond prices tumble, Canada outperforms at long end (Updates to close, adds details, commentary)
By Claire Sibonney
TORONTO, Aug 27 (Reuters) - Canada's dollar jumped against the U.S. currency on Friday while bond prices tumbled after investors looked on the bright side of a downbeat assessment of the global economy by Federal Reserve Chairman Ben Bernanke.
Bernanke warned that the economic recovery has softened more than expected. But he also said the Fed is ready to take further steps if needed to spur the stumbling U.S. economy, which drove demand for assets that do best when the global economy is growing.[ID:nN27259859]
"Investors thought there would be more of a proactive stance in terms of the Fed maybe adopting or outright laying out the groundwork for more of a quantitative easing program," said David Tulk, senior macro strategist at TD Securities.
"That contributed to the bond selloff as far as bonds had priced in their expectations for quantitative easing on a more accelerated timeline ... in terms of the Canadian dollar ... it's consistent with the "risk on" mode of the market."
Quantitative easing effectively means printing more money to buy assets such as longer-term government debt in a bid to drive down borrowing costs.
While some market players saw the silver lining in the Fed not yet pulling out more of its arsenal to stimulate the economy, others acknowledged the positive signal that it stands to do so, which would support riskier assets like the Canadian dollar.
"If you print lots of U.S. dollars, other things being equal, that should be negative for the U.S. dollar vis-a-vis other currencies," said Michael Gregory, senior economist at BMO Capital Markets.
"Even amid all the data that's on the ground now, the Fed still thinks there's another notch we've got to move before you could say that the risk of a double-dip recession is high enough that we have to act," he added. "That assessment was a bit optimistic."
On the data front, a reading on U.S. economic growth, while revised down to a 1.6 percent annual rate in the second quarter, came in a touch better than expected, and investors were reassured by the fact that domestic demand was actually revised higher, said Gregory. [ID:nN26193565]
The Canadian dollar CAD=D4 ended the North American session at C$1.0524 to the U.S. dollar, or 95.02 U.S. cents, up from Thursday's close at C$1.0567 to the U.S. dollar, or 94.63 U.S. cents. However, it was down 0.3 percent for the week.
BOND PRICES SLUMP
Canadian bond prices tumbled after Bernanke's speech, largely tracking U.S. Treasuries, which had their biggest sell-off in three months. [US/]
Bonds slid as Canadian stocks jumped almost 2 percent, reducing demand for safe-haven assets like government debt. [.TO]
The two-year bond CA2YT=RR fell 14 Canadian cents to yield 1.310 percent, while the 10-year bond CA10YT=RR plunged 72 Canadian cents to yield 2.874 percent.
But Canadian bonds outperformed U.S. Treasuries on longer dated issues, with the Canadian 10-year yield 22.7 basis points above its U.S. counterpart, down from about 31 basis points on Thursday. (Editing by Jeffrey Hodgson)