February 12, 2010 / 2:37 PM / in 10 years

CANADA FX DEBT-C$ softens as China tightening weighs

 * C$ slightly down at 94.99 U.S. cents
 * Bonds lifted by risk aversion on China moves
 By Claire Sibonney
 TORONTO, Feb 11 (Reuters) - Canada's currency weakened
against the U.S. dollar on Friday, hurt by a surprise monetary
policy tightening in China, even as strong Canadian economic
fundamentals helped it maintain much of its recent gains.
 China raised the level of reserves that banks must hold for
the second time this year, spooking financial markets on the
eve of its New Year holiday by showing it was intent to curb
lending and inflation. [ID:nTOE61B069]
 The Canadian dollar dipped after the news created a bout of
risk aversion on fear that a slowdown in global growth could
hurt the currency. But it managed to hold on to much of the
strong gains it made on Thursday.
 "Most investors are turning to Canada on a relative basis,
as a very good long play," said Camilla Sutton, currency
strategist at Scotia Capital.
 "We have a strong fiscal position, stronger economic base,
sentiment is in favor of Canada, so all in all Canada continues
to outperform on its crosses."
 At 9:17 a.m. (1417 GMT), the Canadian dollar was at
C$1.0527 to the U.S. dollar, or 94.99 U.S. cents, slightly down
from Thursday's close at C$1.0512 to the U.S. dollar. The
currency on Thursday hit its highest level in two weeks.
 "All in all a little bit of tightening from China is a good
medium-term story because it helps to prevent an asset bubble
and so I think that Canada has clawed back and is now
performing on the crosses," said Sutton, referring to the
Canadian dollar's recent outperformance against most
currencies, including the euro.
 While commodity prices have moved higher over the last few
days, a dip in oil and gold on Friday weighed on the Canadian
 Oil fell by more than $1 to near $74 a barrel while gold
slid 1.5 percent after China's surprise move.  [O/R] [GOL/]
 With global equitiy and commodity markets rattled by China,
risk aversion was back up, lifting Canadian bond prices.
 U.S. Treasury debt prices also rose, rebounding from a
selloff Thursday as Asian buyers returned to the market and
investors looked forward to a week with no new supply. [US/]
 The two-year bond CA2YT=RR was up 5 Canadian cents at
C$100.300 to yield 1.350 percent, while the 10-year bond
CA10YT=RR added 9 Canadian cents to C$102.320 to yield 3.455
 (Reporting by Claire Sibonney; Editing by Jeffrey Hodgson)

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