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