January 20, 2009 / 9:55 PM / 11 years ago

CANADA FX DEBT-C$ slides as greenback rallies

* C$ jumps after rate cut, but down from Monday

* BoC cuts rates 50 bps to 1.0 percent, as expected

* Government bonds lower, pace U.S. market

By Jennifer Kwan

TORONTO, Jan 20 (Reuters) - The Canadian dollar fell versus the U.S. dollar on Tuesday as the greenback rallied against a range of currencies as investors sought safety amid growing worries over the global economy.

The Canadian currency finished at C$1.2676 to the U.S. dollar, or 78.89 U.S. cents, down from C$1.2547 to the U.S. dollar, or 79.70 U.S. cents, on Monday.

“We’re seeing flight to safety to the U.S. dollar and that’s driving all currencies down against the greenback, including our own,” said Sal Guatieri, senior economist at BMO Capital Markets.

Economic concerns may be leading investors to think things will get worse before they get better, said Guatieri, noting: “Clearly, that’s on full display today with equity markets taking another beating.”

North American stock markets sold off sharply on Tuesday as growing troubles in the international banking sector underscored the economic crisis. Toronto’s main stock index .GSPTSE ended down 3.81 percent, while the S&P 500 index .SPX was off 5.28 percent.

Earlier in the session, the Canadian currency firmed after the Bank of Canada cut its key overnight lending rate by 50 basis points to a 50-year low of 1.0 percent.

“The currency rallied briefly because the actual size of the move was less than the market was generally pricing in,” said Guatieri.

But as the session wore on “the market just realized that the bank still has the door open for further rate cuts and that’s likely what we will see in March so it took the currency lower,” he added.

In cutting its key interest rate, the Bank of Canada also predicted a period of falling prices this year as a recession takes hold. It signaled that further cuts may be on the horizon, but said it would judge carefully “to what extent further monetary stimulus will be required”.

The bank is expected to lower its key interest rate at least once more in the first half of the year to help steer the economy out of recession, most Canadian primary securities dealers predicted on Tuesday.

Eight of Canada’s 12 dealers surveyed by Reuters after Tuesday’s rate cut forecast it would lower is key overnight rate again in March.


For most of the day, Canadian government bond prices tracked the U.S. Treasury market, which was lower on supply concerns before staging a late day rally on a selloff in U.S. stocks.

“The main thing is, really, the U.S. bond market that is driving yields higher and prices lower,” said Levente Mady, fixed-income strategist at MF Global Canada in Vancouver.

As well, market watchers said bond prices may have been pressured on disappointment the Bank of Canada did not lower rates more.

The two-year bond was down 14 Canadian cents at C$103.16 to yield 1.028 percent, while the 10-year bond dropped 48 Canadian cents to C$112.95 to yield 2.676 percent.

The 30-year bond fell 35 Canadian cents to yield 3.561 percent. In the United States, the 30-year treasury yielded 2.9650 percent.

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