December 31, 2008 / 3:28 PM / in 9 years

CANADA FX DEBT-C$ edges up, but will post 2008 drop

 * Canadian dollar edges higher vs U.S. dollar
 * C$ to post worst annual drop in decades
 * Bond prices tick lower
 By Lynne Olver
 TORONTO, Dec 31 (Reuters) - The Canadian dollar was
slightly higher against the U.S. currency on Wednesday morning
in subdued, pre-holiday trading, as thinly staffed desks were
processing minimal orders and looking ahead to 2009.
 The Canadian unit will post its worst annual drop this year
in more than 50 years, after an unusually strong performance
against the greenback in 2007, as plunging commodities prices
in the second half of 2008 took their toll.
 Bond prices were up modestly ahead of an early 1 p.m. ET
market close before the New Year's Day holiday.
 At 10:00 a.m. ET (1500 GMT), the currency was at C$1.2198
to the U.S. dollar, or 81.98 U.S. cents, up from Tuesday's
close of C$1.2210 to the U.S. dollar, or 81.90 U.S. cents.
 With limited liquidity this week, currency traders and
strategists said corporate flows were driving activity.
 "We're just swinging in the wind, it's very thin, there's
some very modest month-end flows going through," said Shaun
Osborne, chief currency strategist at TD Securities.
 "In essence, we're just executing business that has to be
done before the month end, there are not a lot of directional
plays going on."
 Overnight, the Canadian dollar held with a C$1.2160 to
C$1.2190 range, then weakend early in the North American
session to C$1.2275 before recovering ground.
 Several analysts said they think the risk is skewed toward
more weakness in the Canadian dollar in the first quarter of
2009, given that a global recession is expected to hurt demand
and prices for commodities. This tends to hurt the Canadian
dollar due to the country's significant energy and materials
 But Osborne said he anticipates a broad decline in the U.S.
dollar next year, which could help the Canadian unit. In his
view, nearly zero short-term U.S. interest rates, a recession,
U.S. budget deficit and non-conventional monetary policy will
weigh on the greenback, possibly pushing up the Canadian
currency to C$1.15 by year-end.
 At Tuesday's closing level, the Canadian dollar is down
nearly 19 percent against its U.S. counterpart this year, its
worst annual showing since at least 1950. The Canadian dollar
began 2008 worth slightly more than its U.S. counterpart, after
a 17.4 percent jump in 2007.
 "It was a year of two halves for the Canadian dollar, it
was generally quite stable in the first half and traded in a
very narrow range against the U.S. dollar, really until
mid-year we stuck close to parity," Osborne said.
 But the Canadian dollar got "smacked around" in the second
half, he said, when credit markets worsened, investors
worldwide avoided risk, a recession loomed and commodities
prices fell.
 Although the Canadian dollar lost ground against the U.S.
dollar, Japanese yen and Swiss franc in 2008, it outperformed
sterling, the Australian and New Zealand currencies, Osborne
 "It was a bit of an average performance when taken in
aggregate," Osborne said.
 Domestic bond prices were lower in light trade, in tandem
with the U.S. Treasury market. The Investment Industry
Association of Canada has recommended a 1 p.m. market close.
 Yields on Canadian bonds continue to be higher than yields
on comparable Treasury bonds, as the Canadian economy, while
believed to be in recession, has not seen similar financial and
real estate crises that emerged in the United States.
 The two-year bond was down 7 Canadian cents at C$103.07 to
yield 1.116 percent. The 10-year bond eased 35 Canadian cents
to C$112.80, yielding 2.699 percent.
 The yield spread between the two-year and 10-year bond was
158 basis points, unchanged from the previous close.
 The 30-year bond was down 45 Canadian cents to C$128.20 and
its yield was 3.437 percent. In the United States, the 30-year
treasury yielded 2.575 percent.
 (Reporting by Lynne Olver, Editing by Chizu Nomiyama)

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