October 31, 2008 / 8:47 PM / in 11 years

CANADA FX DEBT-C$ bounces back to finish week higher

* Records first winning week in five weeks

* Ends October 11.6 percent lower

* Bonds relinquish early gains, end lower

By Frank Pingue

TORONTO, Oct 31 (Reuters) - The Canadian dollar rebounded to close higher against the U.S. dollar on Friday and secure its first weekly gain in five weeks as traders backed out of long U.S. dollar positions.

Domestic bond prices fell across the curve in a volatile session where prices bounces around the break-even level as equity markets moved in and out of negative territory.

The Canadian dollar closed at C$1.2045 to the U.S. dollar, or 83.02 U.S. cents, up from C$1.2180 to the U.S. dollar, or 82.10 U.S. cents, at Thursday’s close.

For the week, the currency rose 5.7 percent, but still ended the month down 11.6 percent as equity markets sold off sharply and prompted a surge in demand for the greenback.

October was a roller-coaster month for the Canadian dollar as it skidded below 77 U.S. cents at one point, its lowest level since September 2004, before bouncing back to hit 84 U.S. cents.

Helping the currency finish October on a slightly positive note was some relative stability in equity and commodity markets later in the month after a series of sharp declines.

And plenty of credit for the Canadian dollar’s strength was not even pegged to the usual fundamentals like higher commodity prices and big-time gains in stock markets.

“There were a couple of decent-sized orders to sell dollar/CAD that went through,” said George Davis, chief technical strategist at RBC Capital Markets. “And in these types of markets, just given the lack of liquidity, that tends to exacerbate the moves up or down.”

The currency showed little reaction to economic data released early in the session that showed the Canadian economy contracted 0.3 percent in August because of weakness in the manufacturing, wholesale trade and energy sectors.

The data was followed later in the day by a report from Toronto-Dominion Bank that said the economy will formally tip into recession at the end of the year.

That marked the third Canadian bank this month to forecast a domestic recession. Bank of of Nova Scotia was first with its recession call early in the month, followed by Bank of Montreal around mid-October.


Bond prices were unable to finish higher as dealers unwound gains recorded early in the session as stock markets managed to bounce comfortably off the lows recorded early in the day.

The Toronto Stock Exchange’s main index closed down 0.95 percent, recovering from a drop of 2.5 percent at one point in the session. The Dow Jones industrial average, which at one point was down 0.6 percent, closed 1.6 percent higher.

The two-year bond finished down 1 Canadian cent at at C$101.46 to yield 2.027 percent. The 10-year bond fell 42 Canadian cents to C$103.83 to yield 3.769 percent.

The yield spread between the two-year and the 10-year bond moved to 173 basis points from 173 basis points at the previous close.

The 30-year bond ended down 75 Canadian cents at C$111.75 to yield 4.283 percent. In the United States, the 30-year treasury yielded 4.364 percent.

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