CANADA FX DEBT-C$ slips as market correlations fade

* C$ ends at C$0.9932 to US$, or $1.0068
    * Currency splits from rising equities, commodity prices
    * Bank of Canada expects to lower growth forecast this week

    By Claire Sibonney
    TORONTO, Jan 21 (Reuters) - The Canadian dollar weakened
slightly against its U.S. counterpart on Monday, bucking the
familiar trend in which investors buy the currency when equity
markets and commodity prices rise.
    U.S. stock markets, which were closed on Monday for the
Martin Luther King Day holiday, ended last week at five-year
highs as early earnings impressed, while gold rose and oil held
steady. Toronto's stock market also rallied to a near 11-month
high, led by a jump in Research in Motion.
    European shares inched toward two-year highs on Monday as a
political attempt to break a budget impasse in the United States
and expectations of aggressive Japanese stimulus bolstered the
appetite for shares. 
    Last week, Shaun Osborne, chief currency strategist at TD
Securities, noted that in terms of cross market correlations,
the Canadian dollar has had a significantly closer link to
stocks at around 80 percent, compared with crude, at less than
40 percent. He said the currency's correlation with the S&P 500
was approaching peak levels of 80 to 90 percent that were
sustained through mid-2012.
    But many analysts now say these typical correlations are
breaking down.
    "We've been trapped in this risk-on, risk-off sentiment and
... and that time I think is decidedly over," said Mark Frey,
chief market strategist at Cambridge Mercantile Group, in
Victoria, British Columbia.
    "I think those correlations are going to begin to come back
down more normalized levels, and we see that even on days when
risk is on, we're not seeing the Canadian dollar respond the way
the same way it did six months ago."
    Instead, market players are expecting top-tier domestic data
such as employment, growth and international capital flows to
have more influence in driving the market.
    "All in all, with all the drivers pointing to Canadian
dollar strength, it doesn't totally follow that the currency has
weakened," said Camilla Sutton, chief currency strategist at
     The Canadian dollar ended the North American
session at C$0.9932 to the greenback, or $1.0068, compared with
C$0.9918, or $1.0083, at Friday's close. 
    Sutton expected the day's range to hold between C$0.9891 and
    The Canadian currency retreated 0.7 percent last week to
near a three-week low as investors knocked it out of a recent
tight range with a push past a technical support level.  
    Sutton suggested the Canadian dollar could have fallen
victim to a staunch of official flows, citing as an example the
Swiss central bank not needing to buy other currencies so
    The Canadian dollar was also weak against other major
currencies, including the euro, the Swiss franc
 and the Japanese yen.
    "We're definitely seeing that North America is separating
itself from some overperformance from the growth perspective
versus both Europe and Japan," added Frey. 
    Canadian bond prices edged lower across the curve, with the
two-year down 2 Canadian cents to yield 1.189
percent, and the benchmark 10-year bond off 13
Canadian cents, yielding 1.935 percent.
    Trading volume was light due to the U.S. holiday, while
investors were also eyeing a Bank of Japan policy-setting
meeting overnight at which the bank is expected to ease monetary
policy further. 
    The Bank of Canada is expected to hold rates steady when it
announces its rate policy on Wednesday, together with the
publication of its Monetary Policy Report. Analysts are
expecting the central bank to lower its growth forecast as
Canada's economy struggles to register more than limp growth.
    Canada's wholesale trade increased by 0.7 percent in
November from October, largely due to higher sales of computer
and communications equipment and supplies, data released on
Mondays showed.  
    Other domestic data on tap this week include retail sales
numbers due out on Tuesday and December consumer price index
data on Friday.