July 7, 2009 / 8:42 PM / 8 years ago

CANADA FX DEBT-C$ sinks as oil, equities tumble

* C$ falls to close at 85.76 U.S. cents

* Weakness in oil price, stock markets pressure currency

* Bonds little changed across the curve (Adds details, quotes)

By Jennifer Kwan

TORONTO, July 7 (Reuters) - The Canadian dollar erased early gains and ended lower against the U.S. dollar on Tuesday, hurt by lower oil prices, which slid on doubts about economic recovery.

Prices for oil, a key Canadian export, dropped for the fifth straight day, with crude futures settling at $62.93 a barrel . [ID:nN07338304]

“That’s really the driving catalyst in the Canadian dollar today,” Charmaine Buskas, senior economics strategist at TD Securities, said of the oil price weakness.

“The fact that there are still looming concerns for the U.S. recovery suggests that we are seeing a little bit of safe-haven flow back into the (U.S.) dollar,” she added. “That is also working in concert with weaker oil prices to push the Canadian dollar lower.”

The retreat came despite better than expected Canadian economic data on Tuesday, Buskas said.

Canadian purchasing activity and building intentions leaped back to life in June and May, respectively, soaring past expectations and suggesting the pace of economic contraction is slowing. [ID:nN07316867]

But the Canadian currency was also pressured by a sharp drop in North American equity markets as talk of a second U.S. government stimulus plan stoked fears that the economy is far from well. [ID:nN07330945]

Lower equity markets are typically seen as a sign of investor aversion to risk, and as such are generally seen as unfavorable for currencies such as the Canadian dollar that are perceived to be riskier than the greenback.

The Canadian dollar finished at C$1.1661 to the U.S. dollar, or 85.76 U.S. cents, down from Monday’s close of C$1.1591 to the U.S. dollar, or 86.27 U.S. cents.

BOND PRICES FLAT

Canadian bond prices were mixed as concerns about more supply coming to market tempered gains that would typically arise from stock market weakness, said Mark Chandler, fixed income strategist at RBC Capital Markets.

“Not big moves generally in Canada one way or another,” he said.

“Given the way equities have performed in the last couple of weeks, you might have thought the bond market would do a little bit better, but there’s still the threat of supply.”

The two-year Canada bond was down 2 Canadian cents at C$100.16 to yield 1.167 percent, while the 10-year bond was up 8 Canadian cents to C$103.50 to yield 3.331 percent.

The 30-year bond was up 15 Canadian cents to C$119.45 to yield 3.855 percent. In the United States, the 30-year Treasury yielded 4.2945 percent.

Canadian bonds mostly underperformed U.S. Treasuries across the curve. The Canadian 30-year bond was 44 basis points below the U.S. 30-year yield, compared with about 49 basis points below on Monday. (Reporting by Jennifer Kwan; editing by Peter Galloway)

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