CANADA FX DEBT-C$ weakens with oil, thin order flow
* Canadian dollar ends down 0.2 pct
* C$ on track for worst annual drop in decades
* Bond prices end mixed
By Lynne Olver
TORONTO, Dec 29 (Reuters) - The Canadian dollar closed down slightly against the U.S. currency on Tuesday as oil prices fell and thin order flows jerked exchange rates around.
The latest dip kept the Canadian unit on track to post its worst annual drop in percentage terms in more than 50 years.
Bond prices were mixed, with long-dated issues down, after Monday's gains across the yield curve on safe-haven buying.
The currency closed at C$1.2210 to the U.S. dollar, or 81.90 U.S. cents, after a volatile session. That was down from Monday's close of C$1.2184 to the U.S. dollar, or 82.07 U.S. cents.
"We have seen a dramatic reduction in market participation and hence liquidity, so it's a flow-driven market more than anything else, with order flow pushing the currencies around," said George Davis, chief technical analyst at RBC Capital Markets in Toronto.
Overnight, the Canadian dollar fell as low as C$1.2340 to the U.S. unit amid weaker oil and gold prices, but regained some ground in afternoon trading as North American equity markets rose. Canada's benchmark stock index, the S&P/TSX composite, rose 2.2 percent.
"We still think the risk is skewed toward additional weakness in the Canadian dollar, given the fundamental backdrop right now," Davis said.
A global recession is expected to hurt demand and prices for commodities, which tends to hurt the Canadian dollar due to the country's significant energy and materials exports.
U.S. crude slipped 99 cents to $39.03 a barrel on Tuesday on concerns about weaker demand.
On a year-to-date basis, the Canadian dollar is down 18.8 percent against its U.S. counterpart, meaning it will put in its worst annual showing since at least 1950. The Canadian dollar began 2008 worth slightly more than the greenback, after a 17.4 percent jump in 2007.
But the supportive factors behind the currency's surge last year -- economic expansion, a dramatic rally in commodity prices, and demand resulting from mergers and acquisitions -- evaporated by late 2008, Davis said. October was an especially volatile month, he noted.
"Basically, all of those positive factors gave way the second half of this year, and in particular the significant decline that we saw in commodities prices really weighed on the Canadian dollar," he said.
SHORT-DATED BONDS UP
Domestic bond prices ended mixed after a big rally on Monday. Short-dated bonds made slight gains, but longer-dated bonds dropped.
The two-year bond rose 12 Canadian cents to C$103.13 to yield 1.092 percent. The 10-year bond declined 47 Canadian cents to C$113.00, yielding 2.677 percent.
The yield spread between the two-year and 10-year bond was 158 basis points, down from 171 at the previous close.
The 30-year bond eased 65 Canadian cents to C$128.40 and its yield was 3.428 percent. In the United States, the 30-year treasury yielded 2.571 percent. (Reporting by Lynne Olver; editing by Rob Wilson)
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