CANADA FX DEBT-C$ hits 1-week high as growth fears ease

* C$ rises to 96.22 U.S. cents

* Bonds lower across the curve

* Bank of Canada cuts 2010 quarterly forecasts

* Canada May retail sales unexpectedly dip, details soothe

* Next up: Canada CPI for June at 1100 GMT Friday (Updates to close)

By Ka Yan Ng

OTTAWA, July 22 (Reuters) -The Canadian dollar finished at its highest level versus the U.S. currency in a week on Thursday as oil prices jumped and equity markets rallied, underpinned by a pack of global signals bullish enough to alleviate economic growth fears.

U.S. crude oil futures rose to an 11 week high above $79 a barrel on a potential tropical storm in the Gulf of Mexico and as better-than-expected economic data gave a lift to equities markets. [O/R]

Major economically sensitive companies, including UPS and 3M, reported strong revenues, while U.S. housing data and better-than-expected euro zone manufacturing and services activity revived appetite for risk. A cautious tone from the Bank of Canada did not dampen market enthusiasm. [ID:nN22230580][ID:nSLALIE68S] [ID:nBRQ009921] [ID:nN22256221]

Major North American stock indexes gained sharply, overcoming some of the negative sentiment on the pace of economic recovery that was sparked by U.S. Federal Reserve Chairman Ben Bernanke’s downbeat testimony on the U.S. economy on Wednesday.

Risk-sensitive assets looked past a spike in the latest week’s U.S. jobless claims, as well as a report that showed Canadian retail sales fell unexpectedly in May for the second straight month. [ID:nN22228055]

“We got a few upside surprises on the data front,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.

“The market basically ignored continuing (U.S. job) claims and preferred to focus on (U.S.) existing home sales. It just made for a very strong risk appetite rally during the last 12 hours or so.”

The Canadian currency CAD=D4 finished at C$1.0393 to the U.S. dollar, or 96.22 U.S. cents, up from Wednesday's close of C$1.0477 to the U.S. dollar, or 95.45 U.S. cents.

The Canadian dollar pared gains briefly after the Canadian May retail sales report, but underlying details showed the decline was largely from price distortion and that volume of sales had climbed in the month. [ID:nN2215189]


With risk appetite seeping back into the market, Canadian bond prices were lower across the curve, tracking U.S. Treasuries. [US/]

The two-year bond CA2YT=RR lost 8 Canadian cents to yield 1.557 percent, while the 10-year bond CA10YT=RR shed 44 Canadian cents to yield 3.212 percent.

In its quarterly Monetary Policy Report, the Bank of Canada cut its growth forecasts for each quarter of 2010, warning for a second time this week that global economic uncertainty and cooling domestic consumption will dampen the recovery. The MPR did little to change market expectations for future interest rate hikes. [ID:nN22208118]

“In terms of market pricing, we haven’t seen a whole lot of significant change in rate expectations,” said Shaun Osborne, chief currency strategist at TD Securities.

Markets are now pricing in about a 47 percent chance of a 25 basis-point increase in the Bank of Canada's benchmark rate in September, according to Thursday's yields on overnight index swaps that reflect expectations for the policy rate. BOCWATCH

Due on Friday, Canada's consumer price index is the next key domestic economic report, with analysts expecting inflation to ease to 1.0 pct in June. [ID:nN1684971] ECONCA

After that, focus will likely be squarely on the results of the release of European banks’ stress test results. [ID:nLDE66L0DJ] [ID:nLDE66J0GP] (Reporting by Ka Yan Ng; editing by Peter Galloway)