December 30, 2008 / 9:57 PM / 12 years ago

CANADA FX DEBT-C$ weakens with oil, thin order flow

 * Canadian dollar ends down 0.2 pct
 * C$ on track for worst annual drop in decades
 * Bond prices end mixed
 By Lynne Olver
 TORONTO, Dec 29 (Reuters) - The Canadian dollar closed down
slightly against the U.S. currency on Tuesday as oil prices
fell and thin order flows jerked exchange rates around.
 The latest dip kept the Canadian unit on track to post its
worst annual drop in percentage terms in more than 50 years.
 Bond prices were mixed, with long-dated issues down, after
Monday's gains across the yield curve on safe-haven buying.
 The currency closed at C$1.2210 to the U.S. dollar, or
81.90 U.S. cents, after a volatile session. That was down from
Monday's close of C$1.2184 to the U.S. dollar, or 82.07 U.S.
 "We have seen a dramatic reduction in market participation
and hence liquidity, so it's a flow-driven market more than
anything else, with order flow pushing the currencies around,"
said George Davis, chief technical analyst at RBC Capital
Markets in Toronto.
 Overnight, the Canadian dollar fell as low as C$1.2340 to
the U.S. unit amid weaker oil and gold prices, but regained
some ground in afternoon trading as North American equity
markets rose. Canada's benchmark stock index, the S&P/TSX
composite, rose 2.2 percent.
 "We still think the risk is skewed toward additional
weakness in the Canadian dollar, given the fundamental backdrop
right now," Davis said.
 A global recession is expected to hurt demand and prices
for commodities, which tends to hurt the Canadian dollar due to
the country's significant energy and materials exports.
 U.S. crude slipped 99 cents to $39.03 a barrel on Tuesday
on concerns about weaker demand.
 On a year-to-date basis, the Canadian dollar is down 18.8
percent against its U.S. counterpart, meaning it will put in
its worst annual showing since at least 1950. The Canadian
dollar began 2008 worth slightly more than the greenback, after
a 17.4 percent jump in 2007.
 But the supportive factors behind the currency's surge last
year -- economic expansion, a dramatic rally in commodity
prices, and demand resulting from mergers and acquisitions --
evaporated by late 2008, Davis said. October was an especially
volatile month, he noted.
 "Basically, all of those positive factors gave way the
second half of this year, and in particular the significant
decline that we saw in commodities prices really weighed on the
Canadian dollar," he said.
 Domestic bond prices ended mixed after a big rally on
Monday. Short-dated bonds made slight gains, but longer-dated
bonds dropped.
 The two-year bond rose 12 Canadian cents to C$103.13 to
yield 1.092 percent. The 10-year bond declined 47 Canadian
cents to C$113.00, yielding 2.677 percent.
 The yield spread between the two-year and 10-year bond was
158 basis points, down from 171 at the previous close.
 The 30-year bond eased 65 Canadian cents to C$128.40 and
its yield was 3.428 percent. In the United States, the 30-year
treasury yielded 2.571 percent.
 (Reporting by Lynne Olver; editing by Rob Wilson)

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