March 30, 2009 / 9:02 PM / in 9 years

CANADA FX DEBT-C$ hit by auto industry distress, bonds soar

 * Risk aversion pushes C$ to near 2-wk low at 79.05 cents
 * Bonds win safety bid as stocks slump
 * BoC's Carney makes no reference to policy in speech
 (Updates to close)
 By Ka Yan Ng
 TORONTO, March 30 (Reuters) - The threat of bankruptcy at
General Motors GM.N and Chrysler drove the Canadian dollar to
almost a two-week low against the U.S. currency on Monday as
the greenback benefited from a flight to safety, as did bonds.
 The distress in the auto industry also stung stock markets
and the price of oil, and helped to push the Canadian dollar as
low C$1.2650 to the U.S. dollar, or 79.05 U.S. cents, a mark
not seen since March 18.
 The currency finished at C$1.2618 to the U.S. dollar, or
79.25 U.S. cents, down sharply from C$1.2374 to the U.S.
dollar, or 80.81 U.S. cents, at Friday's close.
 "Commodity markets are down significantly, equities and
risk are down as well," said Jack Spitz, managing director of
foreign exchange at National Bank Financial. "It's no surprise
to see the Canadian dollar weaker."
 World stocks slumped as U.S. President Barack Obama
prescribed harsher-than-expected medicine for GM and Chrysler,
rejecting their turnaround plans and acknowledging the
bankruptcy is not out of the question. Concerns about the
banking sector in Europe also hit sentiment. For more see
[ID:nLU230709] and [ID:nN29520526].
 In Canada, the government also rejected Chrysler and GM's
plans, but offered bridge loans to tide the companies over
while they restructure. [ID:nN30348498]
 The price of oil fell more than 7 percent to below $49 a
barrel on Monday amid the tumble in global equity markets.
Canada is a major exporter of oil and the currency often tracks
the movement of oil prices.
  Meanwhile, Bank of Canada Governor Mark Carney made no
mention of Canadian monetary policy or the economic outlook in
remarks to the University of Alberta School of Business in
Edmonton, Alberta.
 The speech disappointed some market players looking for
clues about the Bank of Canada's next policy move, whether it
be another interest rate cut or a foray into asset purchases.
 Carney, who has another speech scheduled for Wednesday,
sidestepped the subject entirely and stressed system-wide
financial reform. After the speech, he said that he expected no
change in the world's reserve currency any time soon, reacting
to proposals for replacing the U.S. dollar as the world's main
reserve currency. See story [ID:nN30331272]. See full text of
speech [ID:nN02377767].
 Canadian government bonds blitzed higher across the curve
in a flight-to-safety bid as the troubles in the auto industry
trampled sentiment toward riskier assets such as stocks.
 While the auto industry news was the main driver in the
bond market's rally on Monday, there was a brief pullback once
the U.S. Federal Reserve had finished buying long-dated
Treasuries. [ID:nN30341013]
 "If there was one disappointment, it was that the buyback
of the U.S. long bond wasn't as big as the Street had hoped
for. But pretty much the weak equity markets were the driving
force today," said Sheldon Dong, fixed income analyst at TD
Waterhouse Private Investment.
 He said there were few domestic factors influencing the
Canadian bond market, but "a lot of moving parts" -- including
the upcoming European Central Bank interest rate decision, U.S.
jobs figures, and the summit of the Group of 20 leading
economies in London.
 Canada's January gross domestic product data, due Tuesday,
is expected to show a 0.7 percent decline, following the 1.0
percent drop in December.
 The two-year bond jumped 13 Canadian cents to C$100.29 to
yield 1.114 percent. The 10-year bond gained C$1.02 to C$108.17
to yield 2.819 percent.
 The 30-year bond surged C$1.27 to C$124.77 to yield 3.594
percent. The U.S. 30-year bond yielded 3.601 percent.
 Canada bonds outperformed mostly across the curve, except
in the two-year maturity. The 30-year bond yield was 7 basis
points below its U.S. counterpart, compared with 3.9 basis
points above on Friday.
  (Editing by Peter Galloway)

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