CANADA FX DEBT-C$ falls, bonds climb on growth worries

Tue Aug 31, 2010 5:15pm EDT
 
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 * C$ falls to 93.76 U.S. cents
 * Bond prices add to gains
 * Q2 GDP grows at 2.0 percent annual rate, below forecast
 * Most Canada dealers see Sept rate hike
 (Updates to close, adds details, quotes)
 By Claire Sibonney
 TORONTO, Aug 31 (Reuters) - Canada's currency fell against
the U.S. dollar on Tuesday and bond prices rose after data
showing slower-than-expected growth in Canadian economy in the
second quarter cast further doubt on whether the Bank of Canada
will raise interest rates next month.
 Gross domestic product grew 2.0 percent at an annual rate,
down from 5.8 percent in the first quarter, due to a slowdown
in consumer spending and a weaker trade performance.
[ID:nN31202447]
 The figures further undermined confidence that the Bank of
Canada would continue to raise rates this year. Currencies
usually strengthen as rates rise as higher rates attract
capital flows.
 Second-quarter GDP was the final piece of Canadian economic
data that will feed into the Bank of Canada's decision on
whether to raise rates on Sept. 8. The below-forecast reading
sent market expectations of a rate hike, as measured by a
Reuters calculation of yields on overnight index swaps, much
lower. BOCWATCH
 However, most of Canada's primary securities dealers,
surveyed by Reuters on Tuesday, still forecast the central bank
will raise its key rate by a quarter-point to 1.0 percent next
week. But they also forecast the rate hike would be the last of
2010 due to the slowing economy. [ID:nN31267387]
  Some analysts were heartened by figures showing business
investment picked up and imports grew rapidly in the second
quarter.
 "Not everything is as doom and gloom as some of the
headlines are saying but certainly again the market is grabbing
at any weakness and emphasizing it," said Steve Butler,
director of foreign exchange trading at Scotia Capital.
 "The market had it in their mind that we were going to see
a weak GDP number ... I don't think it was terrible but it
certainly wasn't good."
  The Canadian currency finished the North American session
at C$1.0665 to the U.S. dollar, or 93.76 U.S. cents, down from
from Monday's close of C$1.0605 to the U.S. dollar, or 94.30
U.S. cents.
 The Canadian dollar depreciated 3.6 percent in August, and
Butler noted month-end flows were one of the factors pressuring
the currency on Tuesday.
 He said that C$1.0680 would be the next key resistance
level to break. "If that goes, people will be talking about
C$1.0850 again."
 Globally as well, riskier assets came off the table, with
crude oil futures down $3 toward $71 a barrel and U.S. equities
giving up most of their early gains.
 Appetite for riskier assets faded despite U.S. consumer
confidence rising modestly in August and U.S. homes prices
gaining more than expected in June, easing some worries that
U.S. the economy is headed for another downturn soon.
[ID:nN31237504]
 Also, the latest Federal Reserve minutes revealed that the
outlook for the U.S. economy would have to deteriorate
"appreciably" to spur fresh support from the central bank.
[ID:nN31253959]
 "The Canadian dollar ... has been influenced more by
overall investor appetite for risk then by purely Canadian
issues," said Carlos Leitao, chief economist at Laurentian Bank
of Canada Securities in Montreal.
 "So now the move appears to be again one of risk-off, of
investors seeking refuge in U.S. Treasury bills, and that
drives equity markets down, Canadian dollar down, commodity
prices down. It's all part of the same movement."
 BONDS STAY FIRM
 After the weaker-than-expected domestic GDP data and the
U.S. Fed minutes, most Canadian government bond and U.S.
Treasury prices held their gains. [US/]
 Canada's rate-sensitive two-year bond CA2YT=RR rose 9
Canadian cents to yield 1.205 percent, while the 10-year bond
CA10YT=RR  was up 1 Canadian cents to yield 2.777 percent.
 "We've obviously had a tough run in the equity markets,"
Butler said, also noting that tumbling bond yields are
indicative of how fearful investors are people are about the
struggling U.S. economy. "There's still a lot of nervousness
out there."
 The next key indicator will be Friday's U.S. payrolls
report, given the Bank of Canada has suggested further interest
rate hikes would be weighed against both domestic and global
economic developments.
 (Additional reporting by Ka Yan Ng; editing by Peter Galloway)