CANADA FX DEBT-C$ slips lower, bonds jump

Mon Dec 29, 2008 4:45pm EST
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 * Canada dollar dips 0.8 pct despite brief rally
 * Bond prices jump across curve
 * Concerns linger about weakening economy
 By Lynne Olver
 TORONTO, Dec 29 (Reuters) - The Canadian dollar closed
lower against the U.S. currency in volatile, holiday-thinned
trading on Monday, unable to hold on to afternoon gains despite
higher commodity prices and broad weakness in the U.S. dollar.
 Bonds were higher across the yield curve, in line with
recent gains in the U.S. Treasury market, as rising tensions in
the Middle East prompted safe-haven flows.
 The currency closed at C$1.2184 to the U.S. dollar, or
82.07 U.S. cents. That was down from C$1.2092 to the U.S.
dollar last Wednesday, or 82.70 U.S. cents. Canadian financial
markets were closed Thursday and Friday for the Christmas and
Boxing Day holidays.
 With many market players away on an extended Christmas
break, the currency took some intraday swings as economic
worries continued to weigh.
 "We always have to be cognizant that as we head into the
end of the year, it's very light trading and sometimes the
moves can be outsized because of that," said Eric Lascelles,
chief economics and rates strategist at TD Securities.
 The Canadian dollar initially shrugged off a couple of its
typical drivers: gold and oil prices. Crude rose as high as
$42.20 a barrel in New York on Monday after Israel launched
major airstrikes into the Gaza Strip. Oil prices subsequently
eased, then pushed back up to the $40 area late in the
 Gold futures pared early gains but still closed higher, at
$875.30 an ounce in New York.
 "You can't deny that the commodity story is a relevant one,
commodities have taken a boost today and that is traditionally
a driver of the Canadian dollar," Lascelles said.
 By mid-afternoon, as Canada's main stock index moved
higher, the currency rallied to the C$1.2100 area, but again
retraced its steps.
 Volatility could continue as parties square up their
end-of-year positions, Lascelles added.
 There is no major economic data in Canada or the United
States to lend direction this week.
 Jack Spitz, managing director of foreign exchange at
National Bank Financial, said that Canada's economy is still
perceived as weakening and the central bank is seen as dovish.
 The North American dollar pair could gyrate within a recent
range of C$1.1980 to C$1.2400, he said.
 Domestic bond prices jumped, following U.S. Treasury market
gains last Friday and on Monday.
 "Canada had underperformed substantially over the prior
several weeks and months, so Canada was long overdue for that
catch-up," Lascelles said.
 "Canada's (yield) curve is much steeper than you would
logically expect, when you look at the U.S. curve and some of
the others around the world," he added.
 Since Canada does not have bond supply or inflation
problems, it behooves participants to watch long-dated Canadian
bonds because these could continue to rally, Lascelles said.
 The two-year bond rose 21 Canadian cents to C$103.13 to
yield 1.096 percent. The 10-year bond surged C$1.53 to C$113.45
to yield 2.628 percent.
 The yield spread between the two-year and 10-year bond was
at 171 basis points, up from 161 basis points at the previous
 The 30-year bond rose C$2.10 to C$129.20 to yield 3.391
percent. In the United States, the 30-year treasury yielded
2.644 percent.
 (Reporting by Lynne Olver; editing by Rob Wilson)