April 18, 2008 / 12:49 AM / in 9 years

Loonie erases early fall and moves higher

TORONTO (Reuters) - The Canadian dollar bounced back from an earlier low to move higher versus the U.S. dollar on Friday despite weaker commodity prices and data that showed wholesale trade in Canada unexpectedly fell in February.

Domestic bond prices all but ignored the Canadian data and were pinned lower across the curve as the market has started to believe that the worst of the credit crisis may be over, which has sapped demand for more secure assets.

At 9:40 a.m. EDT, the Canadian unit was at C$1.0073 to the U.S. dollar, or 99.28 U.S. cents, up from C$1.0122 to the U.S. dollar, or 98.79 U.S. cents, at Thursday’s close.

In a delayed reaction, the Canadian dollar rallied along with the U.S. currency after Citigroup Inc, the largest U.S. bank, surprised the market with earnings that were not as weak as expected.

But earlier, the domestic currency fell to C$1.0146 to the U.S. dollar, or 98.56 U.S. cents, after data showed wholesale trade fell 1.8 percent in February when the market was looking for a 0.4 percent rise in wholesale activity during the month.

That data knocked the currency from an overnight high that had seen it rise to C$1.0026 to the U.S. dollar, or 99.74 U.S. cents. The rallying U.S. dollar, which left out the Canadian currency at first, also took its toll.

“The big story was the rebound in the U.S. dollar which had forged higher against ... most other currencies and the Canadian dollar had gone along for the ride,” said Doug Porter, deputy chief economist at BMO Capital Markets.

But the upbeat news out of the United States bodes well for Canada since it relies heavily on the U.S. economy to consume the bulk of its exports.

The commodity-linked Canadian dollar did not receive any support from the price of oil, which slipped from the record high of $115 a barrel it touched earlier this week, or gold futures, which tumbled 3 percent.

Another factor weighing on the Canadian dollar is a looming Bank of Canada rate cut that the market is considering a sure bet for April 22, when the Bank of Canada is scheduled to announce its rate decision.

A Reuters poll taken after key inflation on Thursday showed a large majority of Canada’s primary securities dealers expect the Bank of Canada to cut its key interest rate by 50 basis points to 3 percent next week.

BONDS WEDGED LOWER

Canadian bond prices were down alongside the bigger U.S. Treasury market as the Citigroup results gave the market some more hope that the worst of the credit crisis may be ending.

Strong results from other top companies have the market upping the chance for the U.S. Federal Reserve to cut its Fed rate by 25 basis points at its April 29-30 meeting instead of the previous expectations for a deeper 50-basis-point cut.

“It’s just the growing sense that the worst is over on the credit crisis front that we are seeing creeping across U.S. markets,” said Porter. “So there’s a huge backup in (U.S.) treasury yields this week ... and that’s spilling over big time into Canadian markets today.”

The overnight Canadian Libor rate was 3.4216 percent, up from 3.4017 percent on Thursday.

Thursday’s CORRA rate was 3.4895 percent, up from 3.4858 percent on Wednesday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.

The two-year bond was down 20 Canadian cents at C$101.67 to yield 2.927 percent. The 10-year bond slipped 51 Canadian cents to C$101.92 to yield 3.749 percent.

The yield spread between the two- and 10-year bonds was 82.2 basis points, down from 84.9 at the previous close.

The 30-year bond slipped 61 Canadian cents to C$113.64 to yield 4.185 percent. In the United States, the 30-year treasury yielded 4.574 percent.

The three-month when-issued T-bill yielded 2.57 percent, up from 2.55 percent at the previous close.

Reporting by Frank Pingue; Editing by Scott Anderson

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