January 10, 2008 / 10:20 PM / 10 years ago

Canadian dollar gets boost after Bernanke comments

TORONTO (Reuters) - The Canadian dollar see-sawed its way to a higher close against the greenback on Thursday, as weakness in the U.S. dollar, spurred by renewed expectations of aggressive U.S. interest rate cuts, outweighed some soft data on Canadian building permits.

Domestic bond prices ended mixed as dealers positioned themselves ahead of a Canadian jobs report due on Friday.

The Canadian dollar closed at 99.27 U.S. cents, valuing a U.S. dollar at C$1.0074, up from 99.03 U.S. cents, or C$1.0098, at Wednesday’s close.

Federal Reserve Chairman Ben Bernanke said in a speech that the U.S. central bank was ready to take “substantive additional action” to support economic growth.

Bernanke’s comments firmed market expectations the Fed would cut it benchmark interest rate by 50 basis points to 3.75 percent on January 30, sending the U.S. dollar sharply lower against most major currencies.

That allowed the Canadian dollar to recoup losses from earlier in the session, but the currency was unable to carry the momentum forward.

“We see the Canadian dollar just hovering around parity, even as other currencies are strengthening fairly dramatically against the U.S. dollar,” said Camilla Sutton, currency strategist with Scotia Capital.

“It’s really the growth story -- what’s going to happen to global growth and how does that affect the Canadian economy -- and I think the market is still struggling with that whole issue,” Sutton said.

Recent domestic data has shown signs of strain in the Canadian economy, which had escaped most of the economic woes hitting south of the border in the wake of the subprime mortgage crisis.

The value of building permits fell 9.9 percent in November, which was much steeper than the 2.0 percent decline that analysts had expected.

The building permits data followed a soft report on Wednesday on housing starts and data last Friday that showed purchasing activity plunged 12.8 percent in December.

The building permits data knocked the Canadian dollar lower, but the decline was short-lived.

“Is this trio of steep sags in admittedly third-tier economic indicators an ominous warning for the Canadian economy?” asked Doug Porter, deputy chief economist at BMO Capital Markets.

“In two words ... probably not. While there is plenty to be concerned about on the outlook -- primarily the softening U.S. economy -- this sudden run of weak data in very volatile series is likely noise.”

BONDS MIXED

Bond prices moved higher after the building permits data, but ended the session mixed as traders positioned themselves ahead of key domestic data on Friday.

“Everybody is really looking forward to tomorrow’s labor force survey, especially in the wake of last Friday’s weaker than expected non-farm payroll in the U.S.,” said Max Clarke, economist at IDEAglobal in New York.

A weak Canadian jobs report would support market expectations for a Bank of Canada rate cut later this month, said Clarke. The key overnight rate is currently at 4.25 percent.

The two-year bond was up 13 Canadian cents at C$101.51 to yield 3.409 percent. The 10-year bond fell 2 Canadian cents to C$101.01 to yield 3.870 percent.

The yield spread between the two-year and 10-year bond was 46.1 basis points, up from 37.3 at the previous close.

The 30-year bond dropped 46 Canadian cents to C$115.68 to yield 4.079 percent. In the United States, the 30-year treasury yielded 4.334 percent.

The three-month when-issued T-bill yielded 3.75 percent, unchanged from the previous close.

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