October 29, 2008 / 8:38 PM / 9 years ago

CANADA FX DEBT-C$ surges on commodity-fueled rally

* Canadian dollar rebounds from Tuesday’s 4-year low

* Higher commodity prices support currency’s rise

* Short-end bond prices up after interest rate cuts

By Frank Pingue

TORONTO, Oct 29 (Reuters) - The Canadian dollar rallied more than 3 U.S. cents higher on Wednesday as a jump in prices for key commodities and an extended rebound in equity markets lifted the currency to its highest level in a week.

Domestic bond prices were boosted slightly on the short end of the curve after interest rate cuts in China and the United States sparked demand for more secure government debt, but the rise was muted given the rally in equity markets.

The Canadian dollar closed at C$1.2250 to the U.S. dollar, or 81.63 U.S. cents, up 4.7 percent from C$1.2827 to the U.S. dollar, or 77.96 U.S. at Tuesday’s close.

A rally that began late in Tuesday’s North American session carried on overnight and gathered momentum on Wednesday as prices for Canadian exports such as oil and gold moved further off their recent lows, while improved market sentiment helped lure investors back to equity markets.

The Canadian currency rallied as high as C$1.2126 to the U.S. dollar, or 82.47 U.S. cents, which helped it reclaim a chunk of the big losses suffered in the past month.

“It’s on quite a roll,” said George Davis, chief technical strategist at RBC Capital Markets.

“A lot of the factors that have been a negative for the Canadian dollar over the past few months in terms of declining equities and declining commodity markets have reversed course at least over the past few days.”

The rally marked a significant turnaround from Tuesday when at one point the currency fell to C$1.3019 to the U.S. dollar, or 76.81 U.S. cents, its lowest level since September 2004. That move was blamed largely on investors who continued to liquidate riskier assets in favor of the greenback.

Davis said another factor behind the currency’s latest rally was U.S. dollar profit-taking as investors likely felt its latest rise was a bit stretched.

After its first back-to-back winning sessions in about a month, the Canadian dollar remains down 13 percent in October and 19 percent in 2008.

BOND PRICES MIXED

bond prices reclaimed some of the losses suffered on the short end of the curve as central banks around the globe scrambled to cut interest rates to cushion the economic fallout of the financial crisis.

China cut interest rates for the third time in six weeks to help the world’s fourth-largest economy ride out the global financial crisis, while the Federal Reserve did as expected and cut U.S. interest rates by at least a half-percentage-point.

Also, there is talk that the Bank of Japan is gearing up to cut rates on Friday.

“The main story here is interest rates continue to come down rapidly around the world,” said Doug Porter, deputy chief economist at BMO Capital Markets. “It’s no longer just a North American story any more, we’re seeing rate cuts everywhere.”

But the rise on the short-end of the curve was muted and the long-end fell as the Toronto Stock Exchange’s main index jumped 3.8 percent on strength in commodity prices.

The two-year bond rose 3 Canadian cents to C$101.37 to yield 2.075 percent. The 10-year dropped 47 Canadian cents to C$104.00 to yield 3.748 percent.

The yield spread between the two-year and the 10-year bond moved to 167 basis points from 159 at the previous close.

The 30-year bond fell C$1.15 to C$112.05 to yield 4.266 percent. In the United States, the 30-year treasury yielded 4.227 percent.

Canada’s data calendar will pick up on Thursday with the industrial product price index and the raw materials price index for September, followed by Friday’s gross domestic product report for August.

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