May 26, 2009 / 8:54 PM / 9 years ago

CANADA FX DEBT-U.S. confidence data drives sharp C$ rally

* C$ hits highest level since Oct. 8

* Upbeat U.S. data credited for rally

* Bond prices end down across curve (Recasts and adds details)

By Frank Pingue

TORONTO, May 26 (Reuters) - Canada’s currency closed higher versus the greenback on Tuesday and touched its loftiest level in more than seven months, spurred by a rise in oil prices and by upbeat U.S. economic data that whetted investor appetite for risk.

Early in the session the Canadian dollar was given a boost after U.S. data showed that consumer confidence rose in May to its highest level in eight months. [ID:nN26484791]

That allowed the Canadian dollar to recapture the losses it suffered overnight and gave it enough momentum to rise late in the session as high as C$1.1163 to the U.S. dollar, or 89.58 U.S. cents, its highest level since Oct. 8.

The confidence data was the latest of several reports in the past few weeks to signal an improving U.S. economy and to weigh on the safe-haven status of the greenback, allowing the Canadian dollar to rally from the four-year low it hit in early March.

“We are seeing some risk aversion being taken off the table so that’s taken some of the bid tone out of the U.S. dollar,” said Charmaine Buskas, senior economics strategist at TD Securities.

“Investors are clearly getting more comfortable with the U.S. outlook on the back of that consumer confidence number, so that is helping the Canadian dollar sustain a rally.”

The Canadian unit ended the session at C$1.1178 to the U.S. dollar, or 89.46 U.S. cents, which was up from C$1.1235 to the U.S. dollar, or 89.01 U.S. cents, at Monday’s close.

Buskas also said the price of oil, a key Canadian export, was helping the Canadian dollar’s rally as oil prices were boosted by comments that demand has picked up. [ID:nSYD496746]

The turnaround in the Canadian dollar allowed it to reclaim all the losses suffered overnight, when stocks fell overseas as tension over North Korea’s nuclear tests fueled more debate over the global economic outlook.

That sentiment knocked the Canadian dollar as low as C$1.1356 to the U.S. dollar, or 88.06 U.S. cents, and the currency appeared likely to stay lower during the North American session until the U.S. data boosted sentiment.

“It looked again like a risk aversion day and now we are right back into ‘things are good and the world is safe’,” said Steve Butler, director of foreign exchange trading at Scotia Capital. “It’s amazing how quickly the market just turns a cheek and looks away when we get another bit of good news out of the United States.”

BOND PRICES RATTLED

Canadian bond prices ended down across the curve due to the better-than-expected U.S. data, which sapped demand for secure government debt.

The U.S. report boosted North American equities, including a gain of more than 2 percent in Toronto as investors continued to bid up the key stock index after it hit a five-year low in March. [ID:nN26495247]

“The key catalyst was the consumer confidence numbers in the U.S. ... and when you dig down a little deeper it was because consumers have quite elevated expectations that things will be much better six months down the road,” said Michael Gregory, senior economist at BMO Capital Markets.

“That’s something you can’t say for many indicators now. The expectation component of the confidence index was the highest level it’s been since the recession started ... it’s a very positive indicator economic standpoint.”

Late in the session, Finance Minister Jim Flaherty said Canada will run a deficit of more than C$50 billion, its biggest ever, in the current fiscal year. [ID:nN26501199]

The news had little impact on bond prices, which Gregory said was likely because the market was already preparing for the fact that the deficit was going to be bigger than the government had initially projected.

Canada’s current account balance for the first quarter is due on Friday, but first-quarter GDP figures next Monday will likely be more important for market direction ahead of the Bank of Canada’s next interest rate announcement on June 4.

The benchmark two-year government bond ended down 7 Canadian cents at C$100.09 to yield 1.207 percent, while the 10-year bond slipped C$1,15 to C$102.75 to yield 3.424 percent.

The 30-year bond dropped C$1.950 to C$115.30 to yield 4.079 percent.

Canadian bonds outperformed their U.S. counterparts across much of the curve. The 30-year bond yield was about 12 basis points below the U.S. 30-year yield, almost unchanged from the previous session. (Editing by Peter Galloway)

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