CANADA FX DEBT-C$ softens as political risk weighs

Thu Apr 28, 2011 4:56pm EDT
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 * C$ retreats to $1.0515
 * Underperforms other commodity-linked currencies
 * Markets wary of uncertainty as NDP surges in polls
 * Bonds follow Treasuries higher on weak GDP
 (Adds analysts' comments, updates details)
 By Solarina Ho
 TORONTO, April 28 (Reuters) - The Canadian dollar drifted
lower against the U.S. currency on Thursday, as uncertainty
over the upcoming federal election offset broadbased weakness
in the greenback.
 Canada's May 2 election has created headwinds for the
currency in recent days as support for the left-leaning New
Democrats unexpectedly surged.
 The latest polls show the Conservatives are still set to
win the most seats, but differ on whether its lead over the NDP
was growing or shrinking. [ID:nN28201032]
 "A bit of political uncertainty is probably really what's
getting headlines right now and that's probably what's keeping
the Canadian dollar relatively unchanged and underperforming
the major currencies," said Benjamin Reitzes, an economist with
BMO Capital Markets.
 "Uncertainty is never good for the currency."
 Analysts warned that big gains for the NDP could trigger a
knee-jerk drop in the currency and Canadian equity markets as
investors fret about NDP plans to raise corporate taxes, spend
more and redo energy policy. [ID:nN27126329]
 "The election may well result in more, not less, political
uncertainty, which could translate into increased CAD
volatility," David Watt, senior fixed income and currency
strategist with RBC Capital Markets, said in a note to
 "If the polls do result in the NDP's seat total rising
materially, which is far from a foregone conclusion, CAD might
experience a modest sell off. However, such an outcome is not
unequivocally clear."
 Watt noted there are scenarios in which the NDP's surge
could prove to be positive for the currency, particularly if
the central bank has to carry more of the burden of tightening
macroeconomic policy.
 The Canadian dollar CAD=D4 finished the session at
C$0.9510 to the U.S. dollar, or $1.0515, slipping modestly from
Wednesday's North American finish of C$0.9504 the U.S. dollar.
 Earlier on Thursday, it hit C$0.9465, or $1.0565, its
strongest level since April 21, when the currency reached a
3-1/2 year high.
 The U.S. dollar skidded to a three-year low against a
basket of currencies a day after the Fed signaled it would
prolong its ultra-loose monetary policy. [FRX/]
 The U.S. central bank is lagging other countries in
tightening its monetary policy. In comparison, the Bank of
Canada is widely expected to resume raising interest rates as
early as this summer. [CA/POLL]
 Higher interest rates often support currencies because they
tend to attract international capital flows.
 Concern about the U.S. recovery was reinforced by data on
Thursday that showed U.S. GDP growth fell to a
weaker-than-expected 1.8 percent annual rate in the first
quarter and jobless claims jumped in the latest week.
 Canada is reporting February economic growth data on
Friday, but with consensus coming in flat, BMO's Reitzes does
not expect it to provide direction. ECONCA
 "Unless we get a meaningfully negative number, I don't
think you'll get much change in the Canadian dollar. Weak U.S.
dollar is generally driving everything right now," he said.
 Canadian bond prices generally rose across the curve,
mimicking U.S. Treasuries following the tepid U.S. GDP data.
 The two-year bond CA2YT=RR was up 7.5 Canadian cents to
yield 1.737 percent, while the 10-year bond CA10YT=RR gained
36 Canadian cents to yield 3.229 percent.
 (Editing by Jeffrey Hodgson)