October 28, 2008 / 8:33 PM / 9 years ago

CANADA FX DEBT-C$ storms back to post slim gain

* Canadian dollar rallies off 4-year low versus greenback

* Equity rally prompts demand for risk oriented currencies

* Bond prices dragged down in face of rallying stocks

By Frank Pingue

TORONTO, Oct 28 (Reuters) - The Canadian dollar rallied off a four-year low to close slightly higher versus the U.S. dollar in a choppy session on Tuesday during which investors flocked to the currency as equity markets rallied.

Bond prices ended down across the curve as a slew of bargain-hunting gave a jolt to global stock markets and left little interest in government debt ahead of a widely expected rate cut by the U.S. Federal Reserve on Wednesday.

The Canadian dollar closed at C$1.2827 to the U.S. dollar, or 77.96 U.S. cents, up from C$1.2889 to the U.S. dollar, or 77.58 U.S. cents, at Monday’s close.

After a steep overnight fall in the currency to C$1.3019 to the U.S. dollar, or 76.81 U.S. cents, its lowest level since September 2004, the Canadian dollar spent the North American session bouncing around in a wide range of C$1.2995 to the U.S. dollar to C$1.2797 to the U.S. dollar.

The rally in the Canadian dollar from its overnight low was aided largely by a rally in global stock markets and a slightly improved overall market sentiment.

“The rise in equities attracted some bids to risk oriented currencies ... and that would’ve attracted some initial bids to the Canadian dollar,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“But what offset that to a large degree is month-end flows which are largely supportive of U.S. dollar buying against the Canadian dollar from a hedge ratio standpoint.”

The rise in the Canadian dollar, its first gain in eight sessions, was exaggerated by a lack of liquidity in the marketplace.

But the gain was held in check as investors continued to liquidate riskier assets in favor of the greenback, a practice that has weighed on the Canadian currency in recent weeks.

“When you liquefy you want to be in the most liquid markets and those are the U.S., so I think the U.S. dollar continued to firm against just about everybody,” said Michael Gregory, senior economist at BMO Capital Markets.

With no Canadian economic data due until later in the week, the currency’s direction until then will likely be dictated by overall market sentiment.

The Canadian industrial product price index and the raw materials price index for September are due out on Thursday, followed by Friday’s gross domestic product report for August.

BOND PRICES DROP

Canadian bond prices were all pinned lower after a global equities rally lessened the appeal of secure government debt.

The Toronto Stock Exchange’s main index rallied 7 percent while the Dow Jones industrial average rose nearly 11 percent as both indexes took a bite out of recent skids.

“We had a decent rebound in stocks today and I think that takes a little bit of the allure from bonds,” Gregory said.

Also lessening demand for government debt was the possible interest-rate cut from the Federal Reserve on Wednesday, with many investors betting on a reduction of 50 basis points.

The two-year bond fell 6 Canadian cents to C$101.34 to yield 2.093 percent. The 10-year bond dropped 72 Canadian cents to C$104.40 to yield 3.700 percent.

The yield spread between the two-year and the 10-year bond moved to 159 basis points from 164 at the previous close.

The 30-year bond fell C$1.50 to C$113.15 to yield 4.205 percent. In the United States, the 30-year Treasury yielded 4.206 percent. (Editing by Peter Galloway)

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