July 29, 2009 / 9:02 PM / 8 years ago

C$ gets slapped by sharp slide in oil prices

TORONTO (Reuters) - Canada's currency fell to its lowest close versus the U.S. dollar in a week on Wednesday as prices for oil, a key export, dropped sharply and sapped investors' appetite for risk.

The slide in the Canadian dollar pulled it further from the near 10-month high it hit on Tuesday, yet the selloff lacked conviction and did not cause concern among market experts.

"A middle of the pack performance for the Canadian dollar today, which could almost be seen as impressive given the relatively sharp slide in commodity prices," said Jack Spitz, managing director of foreign exchange at National Bank Financial. "Generally speaking, the flow has been risk averse pretty much all day."

Helping to trigger the slide in the currency were oil prices that dropped nearly 6 percent, the biggest one-day slide since April, after data showed a surge in U.S. crude inventories.

Also prompting an unwinding of Canadian dollar gains was an unexpectedly weak U.S. durable goods report, which reignited the greenback's appeal as a safe haven. The data showed weak demand for new civilian aircraft pulled orders for costly durable goods down in June.

The Canadian dollar closed at C$1.0907 to the U.S. dollar, or 91.68 U.S. cents, down from 1.0831 to the U.S. dollar, or 92.33 U.S. cents, at Tuesday's close.

Spitz said the Canadian dollar is not likely to mirror the sharp retracement it suffered in June since more optimism has been built into investor sentiment, along with better economics and last week's rosier outlook from the Bank of Canada.

"Overall, the fundamentals for Canada tend to be better when compared to its G8 counterparts and as a result we see the Canadian dollar ultimately as a buy," Spitz said. "I don't think we are in store for a huge correction lower."

In fact, Spitz said the Canadian dollar will strengthen over time if it can manage to keep from falling through the C$1.1250 level, or 88.88 U.S. cents.

BOND PRICES RALLY

Canadian bond prices, with no domestic economic data to consider until later in the week, ended higher across the curve as investors fled riskier equities for more secure government debt.

The Toronto Stock Exchange's S&P/TSX composite index fell 1 percent on Wednesday as the drop in oil prices fed fears of a weak economic recovery.

Canadian economic data on Thursday could have a bigger impact on the market. June producer price data is expected to show a rise of 0.3 percent, while raw materials prices for June are expected to rise 3.0 percent.

The two-year Canada bond moved 9 Canadian cents higher to C$99.08 to yield 1.449 percent, while the 10-year bond climbed 23 Canadian cents to C$101.80 to yield 3.531 percent.

The 30-year bond ended up 5 Canadian cents at C$115.75 to yield 4.051 percent. In the United States, the 30-year Treasury yielded 4.514 percent.

Canadian bonds outperformed U.S. Treasuries across most of the curve. The Canadian 10-year bond was about 14 basis points below the U.S. 30-year yield, compared with about 12.7 basis points below on Tuesday.

Editing by Peter Galloway

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