May 10, 2010 / 9:18 PM / 10 years ago

CANADA FX DEBT-Canada dollar rallies on Europe rescue plan

   * Canadian dollar ends at 97.63 U.S. cents
 * Bond prices fall steeply
 * European Union and IMF agree to massive rescue plan
 * Bank of Canada to reestablish Fed swap agreement
 * U.S. crude ends more than 2 percent higher
 (Updates to close, adds details, quotes)
 By Claire Sibonney
 TORONTO, May 10 (Reuters) - The Canadian dollar soared
almost 2 percent against its U.S. counterpart on Monday as
global markets exhaled a huge sigh of relief after European
nations and the International Monetary Fund agreed on an
emergency aid deal aimed at preventing Greece's debt crisis
from spreading.
 The currency CAD=D4 outperformed the rest of the G10
group and shot to a high of C$1.0210 to the U.S. dollar, or
97.94 U.S. cents, early in the North American session.
 Moves higher were held in check as more clarity was sought
on the details and implications of the package.
 European central banks began buying euro zone government
bonds under a $1 trillion global emergency rescue package,
sending the euro up broadly and world stocks surging as markets
felt more secure moving away from the U.S. dollar and other
safe-haven instruments.
 "The market started off with a big bang today and that
quickly faded. Not that the market lost but there wasn't any
follow-through," said Matthew Strauss, senior currency
strategist at RBC Capital Markets.
 "Going forward, the move lower in dollar/Canada will very
much depend on global risk sentiment, and that in turn will
depend on the market's interpretation of the European deal
because currently there are still a lot of unanswered questions
regarding the detail of the rescue package as well as details
about the (European Central Bank's) involvement."
 The Bank of Canada said it would reestablish a US$30
billion currency swap agreement with the U.S. Federal Reserve
in response to liquidity pressures in European markets.
 The facility was part of a broader move by the Bank of
England, the ECB, the Fed and the Swiss National Bank to
prevent the spread of funding strains from Greece to other
European countries.
 The Canadian dollar closed the North American session at
C$1.0243 to the U.S. dollar, or 97.63 U.S. cents, up sharply
from C$1.0438 to the U.S. dollar, or 95.80 U.S. cents, at
Friday's close.
 The aid package helped the Canadian dollar recover part of
its 2.8 percent slide from the week before, the steepest weekly
drop since October.
 "Canada is a beneficiary of a bid to all risk markets. The
plan is audacious in a go-big or go-home kind of way," said   
Jack Spitz, managing director of foreign exchange at National
Bank Financial.
 "So short term, clearly the cause and effect has created a
bid for a number of asset classes, but longer term it remains
to be seen whether this is sustainable," he added.
 The commodity-linked Canadian currency's move higher was
also fueled by oil's rise, with U.S. crude futures ending near
$77 a barrel. [O/R]
 As well, Canadian housing starts inched up 1.3 percent in
April, offering further evidence that recovery in the housing
sector is a major component of Canada's economic recovery.
 "There was no discernible impact on the market but it
continued to confirm the buoyancy of the Canadian economy and
that recovery is on the way and it plays into this slew of good
data coming from domestic Canada," Strauss added.
 "So that in itself is further supporting the view of an
interest rate hike at the next meeting."
 On Friday, the Canadian dollar bounced back from
three-month lows after the jobs report for April, which showed
record gains and put more pressure on the Bank of Canada to
raise interest rates as soon as June.
 Canadian government bond prices sagged across the curve as
safe-haven assets fell out of favor in the wake of the European
aid deal.
 The move tracked U.S. Treasuries, which also tumbled after
the massive euro zone plan eased concern about stocks and other
riskier investments.
 "Obviously what we saw last week was a lot of risk appetite
sucked out of the market over concerns of the European fiscal
crisis," said Ian Pollick, a portfolio strategist at TD
 "Basically the financial world looks like a better place
 The two-year government bond CA2YT=RR dropped 25 Canadian
cents to C$99.12 to yield 1.939 percent, while the 10-year bond
CA10YT=RR shed 65 Canadian cents to C$99.30 to yield 3.584
 Canadian bonds lagged their U.S. counterparts at the short
end of the curve, but outperformed at the long end. The
Canadian 10-year bond yield was 4 basis points above the U.S.
10-year yield, compared with 8.6 basis points on Friday.
 "So for our domestic market, we saw last week with risk
market selloff, obviously Canadian and U.S. bonds were the big
benefactors...there's a little bit of unwinding occurring
 However, Pollick noted that the selloff was thwarted to an
extent because attractive pricing encouraged fresh bids.
 (Additional reporting by Ka Yan Ng, editing by Peter

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