CANADA FX DEBT-C$ falls with oil, flows; bonds mixed

Tue Dec 30, 2008 9:47am EST
 
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 * Canada dollar weakens overnight in thin market
 * Canada unit seen vulnerable to further drops
 * Bond prices mixed after Monday rally
 By Lynne Olver
 TORONTO, Dec 29 (Reuters) - The Canadian dollar was lower
against the U.S. currency on Tuesday morning as oil prices
slipped, setting a weaker tone for the Canadian unit after it
failed to benefit from higher commodity prices on Monday.
 Bond prices were mixed, with the long end down slightly,
after Monday's gains across the yield curve on safe-haven
buying.
 At 9:25 a.m. (1425 GMT), the currency was at C$1.2261 to
the U.S. dollar, or 81.56 U.S. cents in light trade. That was
down from Monday's close of C$1.2184 to the U.S. dollar, or
82.07 U.S. cents.
 Overnight, the Canadian dollar fell as low as C$1.2340 to
the U.S. unit in illiquid markets as oil and gold prices
weakened. Crude oil futures were at $38.93 a barrel in New York
on Tuesday morning, down from the $40 area on Monday.
 Commodity prices are usually a key driver for the Canadian
currency due to the country's energy and materials exports.
 The Canadian dollar looks vulnerable to further weakness on
Tuesday, but "the market is just trying to feel its way," said
Steve Butler, director of foreign exchange trading at Scotia
Capital in Toronto.
 "There's so much volatility, the ranges are quite wide
these days, and people are just trying to get through
month-end, quarter-end and year-end."
 At this time of year, corporate flows are dictating
movements, Butler said.
 "I think a lot of the sellers have already sold, and the
people that still need to buy for year-end are probably waiting
in the wings, hoping for slightly better levels."
 With no major economic data in Canada or the United States
to lend direction and many market players taking an extended
Christmas break, exaggerated moves in the North American
currency pair could continue, traders and strategists said.
 Butler said he would not rule out a U.S. dollar move above
the C$1.2400 level in the coming sessions.
 BONDS MIXED
 Domestic bond prices were mixed after a big rally on
Monday. Short-dated bonds continued to make slight gains, but
longer-dated bonds dropped.
 The two-year bond was up 7 Canadian cents at C$103.08 to
yield 1.117 percent. The 10-year bond was down 62 Canadian
cents at C$112.85, yielding 2.694 percent.
 The yield spread between the two-year and 10-year bond was
at 158 basis points, down from 171 basis points at the previous
close.
 The 30-year bond was down 55 Canadian cents at C$128.50 to
yield 3.423 percent. In the United States, the 30-year Treasury
yielded 2.641 percent.
 (Reporting by Lynne Olver)