CANADA FX DEBT-C$ gains on soft greenback, GDP data

Fri Oct 29, 2010 4:38pm EDT
 
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   * C$ ends at 98.02 U.S. cents; up 0.7 pct for the week
 * Domestic GDP data shows economy grew in August
 * Bond prices edge higher
 (Updates to close, adds quotes)
 By Jennifer Kwan
 TORONTO, Oct 29 (Reuters) - Canada's dollar rose against
its U.S. counterpart on Friday, thanks to healthy economic data
from both sides of the border, while doubts about further
monetary easing by the Federal Reserve weighed on the
greenback.
 The combination of the GDP data and a softer U.S. dollar
helped lift the Canadian currency CAD=D4 to a high of
C$1.0168 to the U.S. dollar, or 98.35 U.S. cents.
 Government data showed Canada's economic recovery picked up
speed again in August after stalling in July. Gross domestic
product climbed 0.3 percent, bolstered by wholesale trade,
manufacturing and oil and gas extraction. GDP shrank 0.1
percent in July, the first contraction in a year.
[ID:nN29223306]
 As well, U.S. data showed economic growth edged up as
expected in the third quarter but not enough to chip away at
high unemployment or change perceptions of more monetary easing
from the Federal Reserve next week. [ID:nN28207235]
 Matthew Strauss, senior currency strategist at RBC Capital
Markets, said the Canadian currency got a boost from the data,
which helped to reduce investor risk aversion.
 "As we entered the North American session, the data came in
either in line with expectations or beating expectations," he
said.
 "It was a paring of risk aversion. This morning, the
futures were significantly negative. Throughout the North
American trading session they became less negative."
 The currency ended at C$1.0202 to the U.S. dollar, or 98.02
U.S. cents, up from Thursday's close at C$1.0215 to the U.S.
dollar, or 97.90 U.S. cents.
 In the background, "the dominate debate and issue is
quantitative easing next week," added Strauss.
 The uncertainty surrounding a fresh round of U.S. monetary
easing ahead of the Federal Open Market Committee meeting
weighed on the U.S. dollar on Friday and prompted investors in
the options market to hedge against any possible volatility.
[FRX/]
 Camilla Sutton, chief currency strategist at Scotia
Capital, said "there's a lot of risk going into the FOMC,"
referring to the U.S. central bank's policy-setting meeting
next week.
 "The potential was that we saw a stronger than expected GDP
print and then that would create fears that the FOMC wouldn't
be as aggressive as the market thinks they're going to be right
now, and that would cause U.S. dollar short covering. With the
relief of that out of the way, the U.S. dollar is weakening off
again," she said.
 Investors have been reassessing their estimates of how much
money the Federal Reserve may commit to a second round of
monetary stimulus -- widely dubbed "QE2" -- when it meets.
[FRX/]
 BONDS HIGHER
 Canadian government bond prices were flat to higher,
tracking U.S. Treasuries where debt prices rose ahead of next
week's Fed meeting at which the U.S. central bank is expected
to announce large-scale purchases of assets. [US/]
 RBC's Strauss said bonds were following a recent trend that
has seen them push higher.
 "It's a realization that the Fed will engage quantitative
easing, although in a not too aggressive way. I think the
uncertainty is that it could continue with this program well
into 2011, which could delay the resumption of the Bank of
Canada's tightening or normalization campaign," he said.
 The Bank of Canada said last week it would have to consider
any further rate hikes carefully, given the patchy global
recovery, a weak U.S. outlook and expected curbs on Canadian
growth. For Take a Look, please see: [ID:nN27276109]
 The two-year bond CA2YT=RR gained 4 Canadian cents to
yield 1.414 percent, while the 10-year bond CA0YT=RR added 55
Canadian cents to yield 2.808 percent.
 (Reporting by Jennifer Kwan; editing by Rob Wilson)