CANADA FX DEBT-C$ hits weakens vs euro after RBA outlook comment

* C$ at 0.9881 vs US$, or $1.0120
    * C$ lowest since May 1 against euro
    * IMF says C$ is 5 to 10 pct overvalued
    * Bond prices mixed

    By Solarina Ho and Claire Sibonney
    TORONTO, Dec 19 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Wednesday as comments earlier
this week from Australia's central bank about an expected peak
in the commodities sector kept commodity-linked currencies under
    The Reserve Bank of Australia said it decided to cut
interest rates this month because it saw further evidence that a
peak in the mining investment boom was near, while the
non-resource sector showed no signs of picking
    "Aussie and Kiwi are well off on that, and I think the
Canadian dollar is weighing a little lower on that as well,"
said Mark Frey, chief market strategist at Cambridge Mercantile
Group, in Victoria, British Columbia.
    Frey also noted a widening spread between Brent and West
Texas Intermediate crude. "Not only is the overall trend
negative but the spread is becoming increasingly negative as
well," he said. "That, with sort of a global sentiment that the
commodity sector might be peaking, is definitely not good news
for the Canadian dollar."
    The Canadian dollar finished the session at
C$0.9881 versus the U.S. dollar, or $1.0120, weaker than
Tuesday's North American finish of C$0.9857, or $1.0145.
    Investors also looked to book profits ahead of the holidays
following a recent rally to two-month highs, while optimism over
a resolution to the U.S. budget crisis also waned as progress in
talks between the White House and congressional Republicans
seemed to slow.
    "I think this is probably some profit-taking heading into
the holidays, because the market was quite short USD/CAD.
Definitely some technical levels have broken on some of the
Canada crosses. ... It's had a very decent rally," said David
Bradley, director of foreign exchange trading at Scotiabank.
    The currency did not react to a smattering of North American
data, including stronger-than-expected expansion of Canadian
wholesale trade in October and a rise in U.S. homebuilding
permits to an almost 4-1/2-year high in November.
    Bradley said the currency's strength has stalled around the
C$0.9825 level against the U.S. dollar and noted a lot of
interest to sell toward C$0.9882.
    Canada was underperforming most major currencies except
other commodity-linked currencies and the Japanese yen. It
touched its weakest level against the euro since May 1 at
C$1.3131, or 76.16 euro cents.
    A key business survey in Germany, Europe's biggest economy,
suggested it was likely to bounce back quickly from its
slowdown. The growing confidence in the outlook lifted the euro
to a 16-month high against the yen and an 8-1/-month peak versus
the U.S. dollar.  
    "It's kind of a confounding day. ... We're seeing a very
different reaction from the pan-European currencies that are
holding up very well against the dollar today, primarily driven
by at least some movement on the fiscal cliff issue," Frey said.
    "You would think that would create sort of a risk-on
mentality, but we're really seeing a divergence today between
the direction in currency markets versus everything else with
the exception of that commodity-linkage for the dollar-bloc
    Citing a sharp widening of Canada's current account deficit,
the International Monetary Fund on Wednesday said the Canadian
dollar was about 5 to 15 percent overvalued, due in part to
heavy flows of foreign investment. 
    Analysts have noted that the IMF's plan to add the Canadian
dollar to its list of reserve currencies may have helped to
boost its appeal. 
    Canadian government bond prices were mixed. The two-year
bond was up 2.9 Canadian cents, yielding 1.137
percent, while the benchmark 10-year bond lost 4
Canadian cents to yield 1.844 percent.