January 29, 2008 / 2:25 PM / 10 years ago

Canadian dollar tops parity as oil prices rally

TORONTO (Reuters) - The Canadian dollar rose above parity versus the U.S. dollar on Tuesday morning for the first time in three weeks as the commodity-linked domestic currency drew support from higher oil prices.

<p>A graph showing world interest rates from 2000 to now. REUTERS/Graphics</p>

Domestic bond prices were lower across the curve as a more stable equity environment reduced investor appetite for the security offered by government debt.

At 9:10 a.m., the Canadian currency was at US$1.0040, valuing a U.S. dollar at 99.60 Canadian cents, up from C$1.0044 to the U.S. dollar, or 99.56 U.S. cents, at Monday’s close.

Earlier it rose to US$1.0055, valuing a U.S. dollar at 99.45 Canadian cents, marking the domestic currency’s highest level since January 8.

Triggering the Canadian currency’s overnight gain was a rise in U.S. crude prices above $91 a barrel and, to a lesser extent, widespread expectations for the U.S. Federal Reserve to cut interest rates on Wednesday.

“We’re seeing a bit of strength in the Canadian dollar in part as oil prices are moving up a bit and that’s offering some support,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“As well, with the weak U.S. housing numbers out yesterday that’s kind of reinforcing expectations that you’re likely to see the Fed go again coming out of this week’s FOMC meeting, so again that’s probably facilitating some of the strength.”

Economic data from the United States on Monday showed December new home sales missed estimates, which supported calls for more Fed rate cuts and weighed on the greenback.

The Fed has cut interest rates by 175 basis points since September, which reduces the greenback’s appeal, and more easing is expected in the near-term to boost economic growth in the United States and avoid a recession.

If the Fed decides on the widely expected 50-basis-point cut after it wraps up its policy meeting on Wednesday, that would put the fed funds rate at 3.00 percent, compared to the Bank of Canada’s key lending rate of 4.00 percent.

The latest piece of domestic data showed manufacturers in Canada reported the bleakest outlook on production since 2002 given the lofty Canadian dollar, high oil prices and a slowdown in the U.S. economy.

BONDS DOWN

Canadian bond prices were stuck lower as more stable equity markets curbed investor appetite for government debt, but moves were limited ahead of Wednesday’s Fed announcement and scores of data still due out this week.

“With the turnaround we saw in equities yesterday I think you’re getting some people moving back into equities and out of fixed income,” said Ferley. “As a result, you’re getting yields moving moderately higher here as people get more comfortable moving into equities.”

Key data still due this week includes U.S. gross domestic product for the fourth quarter on Wednesday, non-farm payrolls on Friday and Canadian November gross domestic product figures on Thursday.

The overnight Canadian Libor rate was at 4.1000 percent, up from 4.0966 percent on Monday.

Monday’s CORRA rate was 4.0089 percent, down from 4.0264 percent on Friday. The Bank of Canada publishes the previous day’s rate at around 9:00 a.m. daily.

The two-year bond was down 13 Canadian cents at C$101.73 to yield 3.270 percent. The 10-year bond was down 18 Canadian cents at C$101.05 to yield 3.868 percent.

The yield spread between the two-year and 10-year bond was 59.9 basis points, down from 63.7 points at the previous close.

The 30-year bond slipped 23 Canadian cents to C$114.25 to yield 4.155 percent. In the United States, the 30-year Treasury yielded 4.327 percent.

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

Editing by Renato Andrade

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