January 24, 2008 / 10:50 PM / 10 years ago

Canadian dollar soars on equities, commodities

TORONTO (Reuters) - The Canadian dollar vaulted well over 1-1/2 cents higher against the U.S. dollar on Thursday, as equities markets rallied, sweetening the outlook for global growth and the commodities that Canada produces.

Canadian bond prices fell across the curve on the equities rally.

The Canadian unit ended the North American session at C$1.0061 to the U.S. dollar, or 99.39 U.S. cents, up from C$1.0236 to the U.S. dollar, or 97.69 U.S. cents, at Wednesday’s close.

Including moves after the official market close, it was the biggest single-day decline for the U.S. dollar against its Canadian counterpart since at least 1982, according to EcoWin. The Canadian dollar rose as high as C$1.0015 to the U.S. dollar, or 99.85 U.S. cents, by 4:40 p.m. (2140 GMT).

The correlation between equity market performance and foreign exchange movements has been unusually high lately, and the Canadian dollar was the beneficiary of Thursday’s equities rally in Toronto, said Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco.

The Toronto Stock Exchange’s key index ended the day up nearly 2 percent as commodities rebounded on the back of a tentative agreement by U.S. lawmakers on a $150 billion economic stimulus package.

U.S. crude oil CLc1 rose more than 2 percent to over $89 dollars a barrel on the news.

“Right now, equity markets are the best barometer for expectations of global growth and they are very sensitive to shifts in confidence and expectations, and that’s essentially why traders are taking their cues from equity markets when determining trades in the FX arena,” Sylvester said.

Canada is a major producer of many key commodities, including oil, and as views on the global growth outlook improve, so too does the outlook for the demand for commodities.

That outlook, combined with a favorable interest rate spread between the key lending rates in Canada and the United States, at 4 percent and 3.5 percent respectively, is giving the currency a boost, Sylvester said.

And the spread could get bigger when the U.S. Federal Reserve meets next week.

“It does look as though you could see the Fed cut by another 50 basis points and that going to take (U.S.) rates down to 3 percent and put Canada at 4 (percent), so a nice 1 percent yield advantage,” Sylvester said.

BONDS FALL

Canadian bonds fell as equities rallied, taking away the safe-haven appeal of government debt.

The Bank of Canada’s Monetary Policy Report Update may have played into the bond price decline as well, said Mark Chandler, fixed income strategist at RBC Capital Markets.

“Even though they’ve got weak growth and low inflation in the near term, they did upgrade their outlook for 2009, so that’s sort of underscores this notion that they expect the current troubles, while very serious, to be temporary.”

The bank said it sees the economy expanding by 1.8 percent in 2008 and 2.8 percent in 2009.

The two-year bond fell 20 Canadian cents at C$101.67 to yield 3.305 percent. The 10-year bond declined 52 Canadian cents to C$100.41 to yield 3.947 percent.

The yield spread between the two-year and 10-year bond was 64.2 basis points, down from 67.9 points at the previous close.

The 30-year bond slid 63 Canadian cents to C$113.02 to yield 4.221 percent. In the United States, the 30-year Treasury yielded 4.385 percent.

The three-month when-issued T-bill yielded 3.40 percent, down from 3.41 percent at the previous close.

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