CANADA FX DEBT-C$ bounces back from early fall, bonds drop

* C$ rebounds from early weakness as oil and equities firm

* Bank of Canada sounds alarm about C$ rise

* Bonds fall as equities gain

* Canada, U.S. jobs data on tap on Friday (Adds details)

By Ka Yan Ng

TORONTO, June 4 (Reuters) - The Canadian dollar rebounded against the U.S. currency on Thursday as the influence of rising equity markets and firmer oil prices outweighed Bank of Canada caution about the currency’s recent strength.

The currency fell in the morning as traders digested unusually strong comments from the central bank about the Canadian dollar’s recent appreciation. [ID:nN0479627]

But as the day progressed, it bounced back, aided by gains on equity markets and the rising price of oil, as the market concluded the central bank’s comments were not that surprising.

The Canadian unit finished at C$1.0968 to the U.S. dollar, or 91.17 U.S. cents, up from C$1.1084 to the U.S. dollar, or 90.22 U.S. cents, at Wednesday’s close.

The Bank of Canada made note of recent significant improvements in financial conditions and commodity prices and a modest recovery in consumer and business confidence. But it said all of that could be lost if the Canadian dollar continues to rise.

“The Bank of Canada in my mind isn’t in the business of swaying currencies or influencing them, either through verbal tactics or through buying and selling,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

“What I took from the statement was just that although a stronger Canadian dollar may normally dampen the outlook (for the economy), enough positive things have happened to make it largely a wash.”

Canada’s export-oriented economy is in deep recession and a stronger currency could hurt demand for exports and stall recovery. The currency is up about 16 percent since early March when it hit its lowest level since September 2004.

Reports on Thursday that showed a drop in building permits, sliding purchasing activity and a rise in bankruptcies highlighted the depth of Canada’s economic slowdown. [ID:nN04234163]

The economy, which suffered a 5.4 percent annualized contraction in gross domestic product in the first quarter, showed further signs of weakness in the second-quarter data, though analysts said some of the reports had silver linings.

Labor reports from Canada and the United States on Friday morning are the next major risk the Canadian dollar faces. The Canadian economy is expected to have shed 33,000 jobs in May after an unexpectedly robust gain in April, while the jobless rate is seen rising to 8.2 percent from 8.0 percent. ECONCA


Bonds were weaker across the curve in reaction to gains on equity markets. Stocks typically trade inversely to bonds as an indicator of risk appetite.

Toronto’s main stock index ended up nearly 2 percent on rallying oil prices, while U.S. stocks rose as a brokerage’s upbeat view on U.S. banks drove a runup in financials. [ID:nTOR004624] [ID:nnN04287832]

The benchmark two-year government bond was off 1 Canadian cent at C$100.17 to yield 1.163 percent, while the 10-year bond fell 54 Canadian cents to C$102.96 to yield 3.398 percent.

The 30-year bond lost 60 Canadian cents to C$116.90 to yield 3.992 percent. The comparable U.S. Treasury issue yielded 4.583 percent.

Canadian bonds outperformed U.S. Treasuries across the curve. The Canadian 30-year bond was 59.1 basis points below the U.S. 30-year yield, compared with 48.2 basis points from Wednesday. (Editing by Peter Galloway)