November 22, 2016 / 9:47 PM / in a year

CANADA FX DEBT-C$ seen vulnerable post-OPEC as bond spreads widen

(Adds strategist comment, updates prices to close)
    * Canadian dollar settles at C$1.3453, or 74.33 U.S. cents
    * Loonie ends weaker after touching strongest since Nov. 9
    * Bond prices higher across yield curve
    * Spread between U.S., Canadian 2-year yields widest since
January

    By Alastair Sharp
    TORONTO, Nov 22 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Tuesday, with one strategist
warning a preoccupation with oil ahead of a key OPEC meeting was
obscuring loonie vulnerability to wider yield spreads between
the two countries' bonds.
    The Canadian currency hit a nearly two-week high during the
session before turning weaker, broadly tracking oil market
gyrations as investors weigh the prospects of an output cut by
major oil producers when they meet next week. 
    The 2-year yield of Canadian government debt fell 1.3 basis
points further below its U.S. equivalent to leave the spread at
-43.6 basis points, its largest gap since January, when the
loonie was trading above C$1.40.
    "There's been this massive disconnect that leaves the
Canadian dollar vulnerable and the only piece keeping it in
place right now is oil," said Eric Theoret, a currency
strategist at Scotiabank. "The only direction to go is down."
    The Canadian dollar settled at C$1.3453 to the
greenback, or 74.33 U.S. cents on Tuesday, weaker than Monday's
close of C$1.3413, or 74.55 U.S. cents.
    Theoret said the currency could be expected to weaken to
around mid-C$1.38 once the Nov. 30 meeting of the Organization
of the Petroleum Exporting Countries is in the rear-view mirror.
    "Canada just really doesn't have a growth narrative right
now," he said, pointing to stretched consumers, disappointing
exports and dismal business investment.
    Domestic retail sales rose for the first time in three
months, but would have been flat without the increased purchases
of cars and parts, data from Statistics Canada showed.
 
    The Canadian currency's weakest level of the session was
C$1.3466, while it touched its strongest since Nov. 9 at
C$1.3378.
    Prices for oil, a major Canadian export, have risen steadily
from near $42 a barrel to around $48 a barrel in the past week
as OPEC has talked up its efforts to reach a production cut.
    An ambitious Asia-Pacific trade pact linking the United
States and 11 countries including Canada lay in tatters on
Tuesday after U.S. President-elect Donald Trump said he would
kill the deal on his first day in office on Jan. 20.
 
    Canadian government bond prices were higher across the yield
curve, with the two-year up 3 Canadian cents to yield
0.659 percent and the benchmark 10-year rising 22
Canadian cents to yield 1.545 percent.

 (Reporting by Fergal Smith; Editing by Richard Chang)

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