CANADA FX DEBT-C$ jumps, bonds slump after Bernanke comments

Fri Aug 27, 2010 5:26pm EDT
 
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   * 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)