April 1, 2008 / 2:08 PM / in 10 years

Loonie rises with North American tide

TORONTO (Reuters) - The Canadian dollar closed higher versus a rallying U.S. dollar on Tuesday as writedowns by big European banks put North American currencies back in vogue ahead of key data due later this week.

Canadian bond prices ended flat across the curve as plans by financial companies to raise capital, viewed as a possible sign that the worst of the credit crisis may be over, sapped appetite for more secure assets like government debt.

The Canadian dollar closed at US$1.0217 to the U.S. dollar, or 97.88 U.S. cents, up from C$1.0265 to the U.S. dollar, or 97.42 U.S. cents, at Monday’s close.

It was a sudden turnaround for the Canadian dollar, which closed the previous session at its lowest level in more than two months because of weaker oil prices and nagging concerns about a weak U.S. economy.

But news that Swiss bank UBS UBSN.VX and Deutsche Bank took a combined $23 billion hit on their risky assets supported the idea that the credit market problems are global and sparked buying of North American currencies.

“I think it’s been more of a U.S.-dollar-based move as being the primary catalyst,” said George Davis, chief technical strategist at RBC Capital Markets.

“And I think in a secondary fashion we’ve seen the equity markets do quite well today ... and I think that has allowed levels of risk aversion to decrease and that’s generally a positive for the Canadian dollar as well.”

North American equity markets rallied, led by a 391-point gain on the Dow Jones industrial average .DJI, after Lehman Brothers Holdings Inc’s LEH.N decision to bolster its balance sheet calmed worries about the financial sector’s stability.

The events overshadowed data released early in the session that showed Canadian producer prices rose a weaker-than-expected 0.1 percent in February.

The Canadian dollar eased slightly after the data, but its move was limited as investors were looking ahead to key March employment data for Canada and the United States due out on Friday.

The market will also look to see if Bank of Canada Senior Deputy Governor Paul Jenkins veers from the bleak statement the bank issued last month when he delivers a speech on “Trends and challenges in the global economy and what they mean for Canada and Ontario” in London, Ontario, on Wednesday morning.

BONDS END FLAT

Canadian bond prices were flat as news that Lehman Brothers said it would offer $4 billion worth of preferred convertible stock lightened investor appetite for government debt.

Sal Guatieri, senior economist at BMO Capital Markets, said a sense that banks’ capital positions are in better shape after the Lehman news was the key factor behind lower bond prices.

“And strong equity markets are sucking a lot of money out of the bond market and the government market in particular,” Guatieri added.

But Guatieri also said bond markets could rally later this week if the job reports, mainly the U.S. report, disappoint.

The two-year bond fell 2 Canadian cent to C$102.36 to yield 2.781 percent. The 10-year bond rose 3 Canadian cents to C$103.40 to yield 3.561 percent.

The yield spread between the two- and 10-year bonds was 78.0 basis points, down from 81.1 points at the previous close.

The 30-year bond rose 7 Canadian cents to C$116.65 to yield 4.024 percent. In the United States, the 30-year Treasury yielded 4.402 percent.

The three-month when-issued T-bill yielded 2.03 percent, up from 1.89 percent at the previous close.

Editing by Peter Galloway

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