November 12, 2010 / 10:00 PM / in 7 years

CANADA FX DEBT-C$ hits one-week low on China rate, Ireland fears

* C$ closes at 99.10 U.S. cents

* Bonds little changed, but outperform (Updates to close, adds commentary)

By Claire Sibonney

TORONTO, Nov 12 (Reuters) - The Canadian dollar fell against its U.S. counterpart on Friday but firmed versus the euro as worries about Irish debt and the potential for a Chinese rate hike triggered a flight from riskier assets.

Ireland is in talks to receive emergency funding from the European Union in a deja-vu of Greece six months ago, official sources said, while rumors swept through the market that further monetary tightening was imminent to stem rising Chinese prices. [ID:nTOE6AB04P] [ID:nTST000631]

“It had sold off as you would expect with all riskier assets selling off, with commodity markets getting pummeled. It hasn’t sold off that badly though,” said Fergal Smith, managing market strategist at Action Economics.

Commodities such as oil, gold and base-metals tumbled, while global equities pulled back sharply.

The Canadian dollar CAD=D4 closed at C$1.0091 to the U.S. dollar, or 99.10 U.S. cents, down from C$1.0032 to the U.S. dollar, or 99.68 U.S. cents, at Thursday’s close. It was off 0.9 percent for the week.

“We’re now back to looking at what’s negative. I think that speaks to an underlying lack of confidence in the state of the global economy. So instead of focusing on the positive, we’re going from one negative to the next negative,” said David Tulk, senior macro strategist at TD Securities.

But the currency pared losses after hitting its lowest in more than a week overnight at C$1.0146 to the U.S. dollar, or 98.56 U.S. cents.

It also outperformed its sister commodity currencies and gained against the euro -- touching a near 8-week high at C$1.3654, or 73.24 euro cents.

“Canada had underperformed on the crosses because of the Canadian economy’s strong link to the United States. But there is some payback now ... in all trades that have been outperforming. You see a pullback in gold, other commodity markets and equities.” said Smith.

BONDS DOWN, BUT CANADA SHINES VS U.S.

Canadian government bond prices largely tracked Treasuries lower as the first day of heavy purchasing by the U.S. Federal Reserve under its quantitative easing plan failed to jump-start wider demand for low-yielding government debt. [US/]

The two-year bond CA2YT=RR was down half a Canadian cent to yield 1.590 percent, while the 10-year bond CA10YT=RR was unchanged to yield 3.026 percent. The 30-year bond CA30YT=RR was flat to yield 3.630.

“We’ve had persistent international criticism of quantitative easing and that’s contrasting with tighter monetary policy in China,” said Smith.

“The market is weighing both the suitability of the policy and its potential duration.”

He noted the recent strong string of U.S. data -- from last week’s surprising jobs numbers to Friday’s consumer sentiment survey -- has further fueled those doubts.

Canadian bonds outperformed their U.S. counterparts across the curve with Canada’s 30-year bond yield trading 65 basis points below its U.S. counterpart.

At the long end, Smith said Canada has benefited from a better fiscal backdrop and a central bank focused on taming inflation, whereas the U.S. Federal Reserve is focused on reinflating their economy.

In addition, U.S. 30-year bonds are not expected to benefit as much from Fed purchases, relative to other areas of the Treasury curve. (Additional reporting by Ka Yan Ng; editing by Jeffrey Hodgson)

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