December 31, 2008 / 7:52 PM / in 12 years

CANADA FX DEBT-C$ ending a down year on up note; bonds slip

 * Canadian dollar strengthens with stocks, oil
 * Drop vs US$ in 2008 is worst fall in decades
 * Bond prices slip in light activity
 By Lynne Olver
 TORONTO, Dec 31 (Reuters) - The Canadian dollar inched
higher against the U.S. currency on Wednesday afternoon in
subdued pre-holiday trading as thinly staffed desks processed
minimal orders and shifted their focus to 2009.
 For the full year, the Canadian dollar posted its worst
annual drop in more than 50 years, after an unusually strong
2007 performance against the greenback, as plunging commodity
prices in the second half of 2008 took their toll.
 Government bond prices closed lower after solid gains in
2008 as investors around the world shunned risk. The bond
market shut early ahead of the New Year's Day holiday.
 At 2:25 p.m. (1925 GMT) the Canadian currency had
strengthened to C$1.2170, or 82.16 U.S. cents, after a swift
afternoon increase in crude oil prices lifted Canadian stocks.
 That was higher than Tuesday's close of C$1.2210 to the
U.S. dollar, or 81.90 U.S. cents.
 "Flows have been very light and moves are exaggerated.
Anything could happen in the next two hours but I think most
market participants on the corporate side have started vacating
their offices," said Dave Bradley, director of foreign exchange
trading at Scotia Capital in Toronto.
 For the year, the Canadian dollar has slumped 18.7 percent,
its worst annual showing against the U.S. dollar since at least
1950, although it did rise against other currencies.
 Traders and strategists said that corporate flows drove
most activity this week.
 "In essence, we're just executing business that has to be
done before the month-end," said Shaun Osborne, chief currency
strategist at TD Securities in Toronto.
 Several analysts said further weakness is probably in store
for the currency in 2009's first quarter, given that a global
recession should hurt demand and prices for commodities. These
swings tend to affect the Canadian dollar due to the country's
hefty energy and materials exports.
 But Osborne said he anticipates a broad-based decline in
the U.S. dollar next year. In his view, U.S. short-term
interest rates near zero, the recession, a U.S. budget deficit
and non-conventional monetary policy will weigh on the
greenback, possibly lifting the Canadian currency to C$1.15 to
the U.S. dollar by year-end.
 The Canadian dollar was worth slightly more than its U.S.
counterpart at the start of 2008, after jumping 17.4 percent in
2007. But in the second half of 2008, credit markets worsened,
U.S. financial companies melted down, a global recession loomed
and commodity prices fell, taking the shine off the currency.
 Although it lost ground against the U.S. dollar and other
majors in 2008, it outperformed sterling, the Australian and
New Zealand currencies, Osborne noted.
 Several events in January could influence the market,
including the Bank of Canada's interest rate decision on Jan.
20 and a federal budget on Jan. 27 that should contain an
economic stimulus package.
 Domestic bond prices slipped in light trade, in tandem with
the U.S. Treasury market, capping a strong year for
government-issued bonds.
 "It has been a theme of flight to quality and flight away
from distressed assets," said Levente Mady, a broker at MF
Global in Vancouver, British Columbia, who specializes in
fixed-income investments.
 "The weaker the credit, the worse beating it took" in 2008,
he added.
 But because price gains have pushed government bond yields
lower and lower, Mady said his firm recommends that clients
move out of government bonds into higher-yielding products such
as provincial bonds and select blue-chip corporate bonds.
 The two-year Canada bond closed down 4 Canadian cents at
C$103.10 to yield 1.100 percent. The 10-year bond eased 25
Canadian cents to C$112.90, yielding 2.688 percent.
 The yield spread between the two-year and 10-year bond was
159 basis points, versus 158 at the previous close.
 The 30-year bond was down 95 Canadian cents at C$127.70 and
its yield was 3.460 percent. In the United States, the 30-year
treasury yielded 2.695 percent.
 (Reporting by Lynne Olver; editing by Rob Wilson)

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