CANADA FX DEBT-C$ hits 3-week low as economic doubts grow

Tue Jun 29, 2010 5:04pm EDT
 
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 * C$ ends at 94.76 U.S. cents
 * Fall of 1.8 pct is biggest drop since May 20
 * Bonds firmer as investors shun risk
 * Canada rate hike expectations continue to ease
 (Updates throughout)
 By Ka Yan Ng
 TORONTO, June 29 (Reuters) - The Canadian dollar hit its
weakest level in three weeks against the greenback on Tuesday,
rocked by worries about world economic growth.
 Markets that often influence the movement of the Canadian
currency fell hard, with the price of oil off more than 3
percent and world stocks under pressure in a new wave of risk
aversion.
 The Canadian dollar CAD=D4 ended at C$1.0553 to the U.S.
dollar, or 94.76 U.S. cents, down sharply from Monday's finish
at C$1.0358 to the U.S. dollar, or 96.54 U.S. cents.
 It spent the entire North American session in negative
territory and dropped as low as C$1.0575 to the U.S. dollar, or
94.56 U.S. cents. The 1.8 percent drop was the biggest since
May 20, when it fell more than 2 U.S. cents.
 The currency's move to a June 8 low coincided with a new
2010 low on the S&P 500 index.  .SPX
 "That's pretty much hand in hand with the way you just saw
a downtick in the Canadian dollar," said Sacha Tihanyi,
currency strategist at Scotia Capital, noting the weakness got
rolling in the overnight session.
 Focus was on a series of soft economic reports and concern
about bank repayments to the European Central Bank, which
pulled the euro sharply lower.  [FRX/]  [ID:nN29137639]
 The hit to sentiment started when the Conference Board
revised its leading economic index for China to a 0.3 percent
gain in April from the 1.7 percent rise the group had reported
earlier. [ID:nN29126233]
 More pressure came from a report that showed U.S. consumer
confidence dropped in June. Canadian data was mixed as factory
prices rose in May, but consumer confidence faltered in June.
 [ID:nN29138077] [ID:N29136753]
 The weakness of recent economic data is making the market a
little more dovish on the speed at which it expects the Bank of
Canada to raise interest rates, Tihanyi said.
 BOND PRICES JUMP
 The increasing focus on the tenuousness of the economic
recovery has seen a sharp turnaround in interest rate hike
expectations. Yields on overnight index swaps, which trade
based on expectations for the central bank's key policy rate,
now point to a less than 60 percent chance of a 25 basis point
hike on July 20. That is down from around 80 percent last week.
BOCWATCH
 That has helped Canadian government bond prices rise
recently. On Tuesday, they surged across the board, tracking
U.S. Treasuries, as equity markets dropped on worries over
euro-zone debt problems and the uneven global economy.
 "It's clearly events overseas beginning with some question
markets about growth in China, and then obviously today's
consumer confidence report in the U.S. was a surprise on the
downside in terms of economic growth," said Mark Chandler, head
of Canadian fixed income and currency strategy at RBC Capital
Markets.
 "So the near-term momentum in the global economy, that
notion has been challenged by some of the recent indicators."
 The two-year government bond CA2YT=RR climbed 23 Canadian
cents to yield 1.383 percent, while the 10-year bond
CA10YT=RR rose 52 Canadian cents to yield 3.104 percent.
 (Additional reporting by Jennifer Kwan; editing by Peter
Galloway)