July 6, 2016 / 9:27 PM / in 4 years

CANADA FX DEBT-C$ stronger as oil rises, trade deficit widens

(Adds analyst comment, details; updates prices to close)
    * Canadian dollar settles at C$1.2959, or 77.17 U.S. cents
    * Bond prices mostly higher across the maturity curve

    By Alastair Sharp
    TORONTO, July 6 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, boosted by a rebound
in oil prices and shrugging off domestic economic risks as
Canada posted a near-record trade deficit.
    The loonie, as the currency is colloquially known, had
weakened as investor jitters about the implications of Britain's
vote to quit the European Union supported assets perceived as
safe havens. The yield on Canadian government 10-year bonds
touched its lowest since February.
    But the currency rebounded and bond yields recovered
somewhat as prices for oil, a major Canadian export, jumped
after two days of declines. 
    "The main theme driving the Canadian dollar turnaround today
was a rebound in oil prices," said Adam Button, currency analyst
at ForexLive in Montreal. "The market is searching for a theme
and trying to understand what comes next after a Brexit."
    Canada posted its second-largest trade deficit on record in
May, a large negative surprise, as widespread export weakness
canceled out higher shipments from the battered energy sector,
government data indicated. 
    The Canadian dollar settled at C$1.2959 to the
greenback, or 77.17 U.S. cents, stronger than the Bank of
Canada's official close of C$1.3016, or 76.83 U.S. cents.
    "The evidence on the weakness in the Canadian dollar so far
paying dividends for the non-energy economy is quite patchy,"
said Adam Cole, global head of currency strategy for RBC Capital
Markets in London, referring to the trade data. 
    "As long as that's the case it's a vulnerability for the
currency," he said, adding that further weakness this year would
likely not push the currency beyond C$1.35.
    Canadian government bond prices were mostly higher across
the maturity curve, with the two-year price up 1.5
Canadian cents to yield 0.485 percent and the benchmark 10-year
 rising 16 Canadian cents to yield 0.979 percent.
    The 10-year yield fell as low as 0.938 percent during the
    The Canada-U.S. two-year bond spread was -9.6 basis points,
while the 10-year spread was -40.0 basis points.

 (Reporting by Alastair Sharp; Editing by Chizu Nomiyama and
James Dalgleish)
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