Canadian dollar benefits from a weaker greenback

Thu Feb 28, 2008 9:48am EST
 
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 By John McCrank
 TORONTO, Feb 28 (Reuters) -  The Canadian dollar climbed
against the U.S. dollar on Thursday, mainly as a result of
softness in the greenback, but also due to commodity prices
which, while off recent highs, remain elevated.
 Domestic bond prices, with no domestic data to influence
direction, followed the larger U.S. Treasury market higher as
data pointed to further weakness in the U.S. economy.
 At 9:21 a.m. (1421 GMT), the Canadian dollar was at
US$1.0219, valuing a U.S. dollar at 97.86 Canadian cents, up
from US$1.0196, valuing a U.S. dollar at 98.07 Canadian cents,
at Wednesday's close.
 The Canadian dollar is up around 3 percent so far this
week.
 "The most important driver at the moment is broad-based
U.S. dollar weakness," said Matthew Strauss, senior currency
strategist at RBC Capital Markets.
 The greenback has been hammered as of late due to the U.S.
economic downturn and the expectation that the U.S. Federal
Reserve will continue with its aggressive interest rate cutting
campaign to promote domestic growth.
 Fed Chairman Ben Bernanke told the House Financial Services
Committee on Wednesday the Fed will "act in a timely manner as
needed to support growth and to provide adequate insurance
against downside risks".
 U.S. dollar weakness will remain the primary driver of the
Canadian dollar leading into key domestic data next week, said
Strauss.
 "In the very short term, we could see the Canadian dollar
drifting a little bit higher, but I think the focus will start
shifting more and more to the GDP data (for the fourth-quarter
and for December) on Monday, and then more importantly, the
Bank of Canada decision on Tuesday."
 A Reuters poll taken earlier this month showed that the
majority of Canada's primary security dealers are expecting the
bank to cut its key lending rate by 50 basis points to 3.5
percent. But Strauss said a 50 basis-point cut is not a sure
thing, and if it doesn't happen, the Canadian dollar could see
more strength.
 In the meantime, the commodity backdrop is also working in
the Canadian dollar's favor. While off recent highs, oil is
over $100, copper is above the $8000 mark and is gold trading
north of $950.
 Canada is a major producer of many key commodities.
 BONDS HIGHER
 Canadian bond prices rose along with the larger U.S.
Treasury market after more signs of weakness in the U.S.
economy fueled speculation of steeper Fed interest rate cuts.
 Data showed a big jump in U.S. initial weekly jobless
claims.
 U.S. short term interest rate futures point to a 32 percent
chance of a 75 basis point rate cut, to 2.25 percent, by the
U.S. central bank. The Fed meets two weeks after the Bank of
Canada makes it's monetary policy announcement on Tuesday.
 Strauss said he expects the Fed to cut by 50 basis points
at both of its next two meetings.
 The Canadian economic calendar is set to pick up on Friday
with the industrial product price and raw materials price
indexes for January.
 The overnight Canadian Libor rate LIBOR01 was 4.0833
percent, up from 4.0500 percent on Wednesday.
 Wednesday's CORRA rate CORRA= was 3.9949 percent, down
from 4.0012 percent on Tuesday. The Bank of Canada publishes
the previous day's rate at around 9 a.m. daily.
 The two-year bond rose 13 Canadian cents to C$102.15 to
yield 2.975 percent. The 10-year bond gained 45 Canadian cents
to C$101.85 to yield 3.760 percent.
 The yield spread between the two- and 10-year bond was 78.5
basis points, down from 76.7 basis points at the previous
close.
 The 30-year bond added 70 Canadian cents to C$114.45 to
yield 4.142 percent. In the United States, the 30-year Treasury
yielded 4.556 percent.
 The three-month when-issued T-bill yielded 3.20 percent,
down from 3.21 percent at the previous close.
 (Editing by Renato Andrade)