January 14, 2011 / 10:27 PM / in 9 years

CANADA FX DEBT-C$ dips after China tightens; euro hopes support

 * C$ lower at C$0.9894, or $1.0107
 * China tightening offset by improved euro zone outlook
 * Bonds decline across the curve
 * Focus on Bank of Canada next week
 By Solarina Ho
 TORONTO, Jan 14 (Reuters) - Canada's dollar nudged lower
against the greenback on Friday, pressured by bank tightening
in China, but easing concerns about the euro zone debt crisis
helped the commodity-linked currency recoup early losses.
 The euro was set for its best week in over a 1-1/2 years
following successful securities auctions by indebted euro zone
members, calming fears of a credit crisis in the region.
 "We've seen a bit of a revival in the euro," said Craig
Wright, chief economist at Royal Bank of Canada. "When people
get a little more comfortable with risk, they tend to sell the
U.S. dollar and buy others, including Canada."
 Strength in North American equity markets and oil prices
also helped provide support. [O/R] [.N]
 Earlier in the session, the Canadian dollar fell nearly a
penny, moving closer to U.S. dollar parity, after China's
central bank raised the reserve requirement ratio for its
biggest banks. [ID:nTOE706030]
 Beijing's move fanned expectations that China's appetite
for commodities could wane, which hit resources prices as well
as currencies of commodity-exporting countries like Canada.
 "I don't think anybody is really that shocked that China is
slowly trying to raise rates and raise some of the banking
requirements," said Steve Butler, director of foreign exchange
trading at Scotia Capital.
 "If the commodities continue to materially trade lower then
I think that may be a game changer but I think it's too soon to
say just yet ... if the U.S. economy picks up some steam then
that will be supportive for the Canadian dollar as well."
 The currency CAD=D4 finished at C$0.9894 to the U.S.
dollar, or $1.0107, down from Thursday's North American finish
of C$0.9892 to the U.S. dollar, or $1.0109.
 "It's not a huge move, relative to recent history. So a
little bit of stability's probably not a bad thing," said
Wright, adding that in the near term, he expected the currency
to continue to trade stronger than the U.S. dollar.
 The currency moved in a tight range on Friday, hitting a
high of C$0.9885 and low of C$0.9978, with a slew of U.S. data
having limited impact.
 "It was a heavy data day, but not a heavy data-surprise
day," said Wright.
 Attention is shifting to the Bank of Canada, which will be
announcing its latest rate decision and issuing its monetary
policy report next week.
 "It will be interesting to see how they're going to weigh
the strength of the currency against a pick-up in the U.S.,"
said Butler. "Things in Canada look pretty solid so there is
that fine line."
 Given the economic developments, particularly south of the
border, analysts are expecting the central bank to raise its
2011 growth forecast. But it is also seen as wary about using
language that could spark further Canadian dollar gains.
 A Reuters poll of 45 forecasters unanimously predicted the
Bank of Canada will keep interest rates unchanged, though more
than half the respondents said the next rate hike would occur
sometime in the first half of 2011. [CAD/POLL]
 Canadian government bond prices eased across the curve, as
investors moved toward riskier assets.
 The interest rate-sensitive two-year bond CA2YT=RR was
off 2.5 Canadian cent to yield 1.790 percent, while the 10-year
bond CA10YT=RR lost 15 Canadian cents to yield 3.271
 (Editing by Jeffrey Hodgson)

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