CANADA FX DEBT-C$ hits 2 1/2 year high in last session of 2010

Fri Dec 31, 2010 2:23pm EST
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   * Canadian dollar finishes above US$ parity at $1.0054
 * Hits highest level since late May 2008
 * Mirrors strong commodity gains
 * Currency rises 5.7 pct this year
 * Muted volumes in bond market, yields seen rising in 2011
 (Updates to close)
 By Ka Yan Ng
 TORONTO, Dec 31 (Reuters) - Canada's dollar hit its highest
in more than 30 months on Friday, boosted by rallying
commodities, to close out the year above parity with the U.S.
currency on scant New Year's Eve trading volumes.
 The Canadian dollar reached as high as C$0.9925 to the U.S.
dollar, or $1.0076, a peak last touched in May 2008, after
briefly poking through a technical support level.
 Analysts noted the move to break C$0.9931 to the U.S.
dollar came under very thin trading conditions on the last day
of a year that included the Bank of Canada's first rate hikes
following the financial crisis, euro zone debt troubles, rising
commodity prices, and the U.S. Federal Reserve's stimulus
 The gains were also made as the U.S. dollar fell broadly as
investors closed their books on 2010. [FRX/]
 The Canadian dollar's strength also coincided with a
reversal in the price of oil, which surged back above $91 a
barrel as the weaker U.S. dollar and technical support stopped
a bout of year-end profit taking. [O/R]
 Other commodity-linked currencies, such as the Australian
dollar -- which hit a 28-year high against the greenback --
remained in favor on expectations that Asia will extend the
global recovery in 2011.
 "Canada is kind of in the middle of the pack ... but you're
getting that sense that, after a long year and some very
shallow trading, there's this sentiment of a weaker U.S. dollar
heading into year-end," said David Tulk, senior macro
strategist at TD Securities.
 Factbox on 2010 market performance of key Canadian assets:
 The Canadian dollar CAD= CAD=D3 finished at C$0.9946 to
the U.S. dollar, or $1.0054, up from Thursday's close at par,
which was the loonie's first finish at the one-for-one level
since Nov. 10.
 "The market does appear to have some optimism built into
it, just like yesterday. We've seen a bit of a breakout in
terms of the dollar/Canada range that has dominated in the last
few sessions ... but it's thin and it's the year-end," said
Jack Spitz, managing director of foreign exchange at National
Bank Financial.
 Slim trading volumes ahead of the New Year's holiday
brought choppy conditions for the Canadian dollar but, overall,
the currency will hover around parity into 2011, analysts say.
 "We're still constructive on our outlook for the Canadian
dollar. All the fundamentals of support are still there and we
expect further monetary policy support to come in line in the
second half of 2011," said Sacha Tihanyi, currency strategist
at Scotia Capital.
 "We also think that it's behavior is (going to) be very
much like we saw in 2010 in the sense that gains are going to
be restrained and there's going to be a lot of back and
 Tihanyi expects the Canadian dollar will rise 4 percent
from current levels, slightly less than this year's advance of
5.7 percent.
 But, TD had a softer outlook for the Canadian dollar next
year, citing factors such as euro zone debt risk and a forecast
of a firmer greenback than what many people currently expect.
 Canadian government bond yields closed out the year with a
modest decline in quiet trade, but analysts said the year ahead
should see them climb, particularly in the second half of the
 "That'll start being driven largely by anticipation that
the Bank of Canada tightening. That's really the major dynamic
at play," said Tulk.
 He said domestic government bonds are expected to
underperform U.S. Treasuries partly because the U.S. Federal
Reserve is not expected to budge from current ultra-low
interest rates.
 Market watchers are mixed about the timing of future
interest rate hikes from the Bank of Canada. Among the 12
Canadian primary dealers -- those that deal directly with the
central bank to help it carry out monetary policy -- the
majority forecast rate increases in the second half of the
year, with a median prediction for the first hike in July.
 The two-year bond CA2YT=RR  rose 9 Canadian cents to
yield 1.678 percent, while the 10-year bond CA10YT=RR yielded
3.117 percent. Most domestic bonds outperformed their U.S.
counterparts, except in the belly of the curve.
 Canadian financial markets are closed on Monday.
 (Editing by Jeffrey Hodgson)