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* C$ rises to 96.35 U.S. cents, highest since Oct 20
* Bonds tumble on recent stock market rally
TORONTO, Dec 29 (Reuters) - The Canadian dollar hit a 2-1/2 month high against the U.S. dollar on Tuesday, aided by healthy appetite for risk and merger- and acquisition-related flows.
At 9:25 a.m. (1425 GMT), the Canadian dollar was at C$1.0379 to the U.S. dollar, or 96.35 U.S. cents, up from C$1.0499 to the U.S. dollar, or 95.25 U.S. cents, at Thursday's close. Canadian markets were closed on Friday and Monday.
Like other commodity-bloc currencies, the Canadian dollar made gains against the U.S. dollar as prices for oil and key metals gained. The higher-yielding Australian dollar rose to a 12-day high, while the New Zealand dollar also climbed.
Merger and acquisition activity also helped boost the Canadian dollar. Metals explorer Corriente Resources Inc CTQ.TO said China's CRCC-Tongguan Investment Co Ltd has offered to buy all of its outstanding shares in a deal worth about C$679 million. [ID:nSGE5BR09U]
"The technical picture has now become CAD-friendly and that's a contributing factor to the already positive fundamentals," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"The breach of C$1.0406 was important in as far as it broke the three-month range and it now sets up the possibility of targeting C$1.0207 and then parity."
The currency was relatively steady after the Standard & Poor's/Case-Shiller index showed U.S. home prices were flat in October. [ID:nNYS007656]
On Tuesday, investors will also take in U.S. consumer confidence for December at 10:00 a.m. ECONUS
Trading in this holiday-shortened week is expected to be thin, which could prompt the currency to make exaggerated and choppy moves. No Canadian economic data is on tap this week.
Canadian bond prices fell hard on Tuesday as risk appetite continued to favor assets such as stocks, which have rallied as the end of the year approaches and as investors have put worries about a major world financial collapse behind them. [MKTS/GLOB]
The two-year government bond CA2YT=RR fell 14 Canadian cents to C$99.59 to yield 1.468 percent, while the 10-year bond CA10YT=RR dropped 46 Canadian cents to C$100.72 to yield 3.659 percent. (Reporting by Ka Yan Ng; editing by Peter Galloway)