August 17, 2010 / 9:11 PM / in 10 years

CANADA FX DEBT-C$ surges on BHP's $39 bln Potash bid

   * C$ rises to 96.81 U.S. cents
 * Potash rejects BHP’s $39 bln bid
 * Bonds prices weaken as stocks rise  (Updates to close, adds details, commentary)
 By Claire Sibonney
 TORONTO, Aug 17 (Reuters) - The Canadian dollar gained more than a penny against the greenback on Tuesday, boosted by a blockbuster takeover bid for Potash Corp POT.TOPOT.N and broader rise in investor appetite for riskier investments.
 BHP Billiton BLT.L (BHP.AX) launched an unsolicited $38.6 billion bid for Potash Corp of Saskatchewan in a proposal that would make the Australian mining giant the world’s leading fertilizer supplier. [ID:nNSGE67G0D]
 The acquisition offer — the largest of the year in any industry — was immediately branded by Potash Corp  as “grossly inadequate,” though the Canadian company said it might consider a more attractive proposition.
 Foreign investors, anticipating that BHP’s $130-a-share offer would eventually rise, poured into the stock. This helped push the Canadian dollar CAD=D4 as far as C$1.0309 against its U.S. counterpart, or 97 U.S. cents, making it the day’s outperforming major currency.
 “The U.S. dollar felt a little weak to begin with, and I think with positive equity sentiment, we would have worked our way lower anyway, but this story certainly has accentuated the Canadian dollar,” said Shane Enright, executive director of foreign exchange sales at CIBC World Markets.
 The risk backdrop was improved by factors including solid demand for European bond auctions, expanding U.S. corporate earnings and industrial production and a subsequent rally in equity and commodity markets.
 Analysts said the Canadian dollar could rise to equal value with the U.S. dollar for the first time since April if the bidding to acquire the world’s largest fertilizer producer heats up as expected. [ID:nN17146793]
 “In the currency world, they’ll probably watch the Potash stock price fairly closely for cues in terms of how the equity market is reading the likelihood of a deal, and where that deal may take place in terms of a final price,” added Enright.
 The Canadian dollar closed the North American session at C$1.0329 to the U.S. dollar, or 96.81 U.S. cents, up from Monday’s finish at C$1.0446 to the U.S. dollar, or 95.73 U.S. cents.
 Enright said the next important levels to watch would be a close stronger than the 100-day moving average of C$1.0320. From there, C$1.0260 is a point of recent price congestion.
 However, currency watchers warned that strength could prove fleeting, with enthusiasm about capital inflows from mergers and acquisitions overridden by broader global economic weakness.
 “It would depend what the global backdrop looks like. If it’s a period like we saw last week with stronger risk aversion the most it will influence is to hinder the sell-off of the Canadian dollar,” said Matthew Strauss, senior fixed-income and currency strategist, RBC Capital Markets.
 In a recent report, Strauss noted that since 2000, 26 of the 33 major deals worth $2.5 billion or more resulted in a stronger Canadian dollar during the five days following the announcement.
 Looking to the rest of the week, the market will be focused on initial jobless claims in the United States, which risk a third consecutive weekly rise, as well as crucial Canadian inflation data for July, which may affect the Bank of Canada’s decision on whether to hike rates again in September.
 With riskier assets back in play, Canadian bond prices fell, tracking a weaker U.S. Treasury market as traders booked profits after a Monday rally that sent longer-dated yields to their lowest in nearly a year and a half. [US/]
 Canada’s two-year bond CA2YT=RR shed 8 Canadian cents to yield 1.391 percent, while the 10-year bond CA10YT=RR knocked off 37 Canadian cents to yield 2.968 percent.
 “It plays into the return of risk appetite, and underlying obviously a slightly less bearish outlook going forward on the recovery scenario and on the back of that, bonds under pressure globally,” added Strauss.   (Reporting by Claire Sibonney; Editing by Jeffrey Hodgson)                                                      

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