December 6, 2007 / 12:14 AM / in 10 years

Canadian dollar extends skid as oil prices fall

TORONTO (Reuters) - The Canadian dollar finished lower against the U.S. currency on Wednesday, dragged down by a slide in oil prices, follow-through from the unexpected Bank of Canada rate cut earlier this week, and a stronger greenback.

Domestic bond prices, with no Canadian data to consider, took their cue from the bigger U.S. treasuries markets and ended down after strong U.S. data.

The Canadian dollar closed at 98.49 U.S. cents, valuing each U.S. dollar at C$1.0153, down from 98.77 U.S. cents, or C$1.0124, at Tuesday’s North American close.

A drop in oil prices to below $88 a barrel, due mainly to fears over the health of the U.S. economy, shook the Canadian dollar since Canada is a major producer and exporter of oil and its currency often follows crude prices.

The Bank of Canada’s rate cut on Tuesday, which went against most expectations for the central bank to stand pat until January, also weighed on the domestic dollar as lower rates generally make a currency less attractive.

The drop in the Canadian dollar was magnified as the U.S. currency rallied after data showed robust jobs growth that suggested a milder economic slowdown than many had thought.

“There was a whole panoply of things undercutting the Canadian dollar,” said Doug Porter, deputy chief economist at BMO Capital Markets. “And, in some sense, you could almost say it’s a bit surprising it didn’t weaken even more given the forces stacked against it today.”

Since hitting a modern-day high of US$1.1039 on November 7, the Canadian dollar has retreated about 11 percent, due mainly to a sudden wave of weak domestic economic data, lower oil prices and concerns about the global economic picture.

But with key U.S. and Canadian jobs data due at the end of the week and a U.S. Federal Reserve rate decision on tap for next week, the currency could halt its slide.

Incoming Bank of Canada Governor Mark Carney said on Tuesday the currency’s volatility was not completely explained by fundamentals, while Canadian Finance Minister Jim Flaherty said its recent retreat had reduced concerns about the negative impact it could have on the economy.


Canadian bond prices ended lower across the curve as a stronger than expected U.S. private jobs report pointed to a possible uptick in the official government numbers due later in the week.

A strong jobs report on Friday would reduce expectations of aggressive interest rate easing by the Fed.

Also weighing on bond prices was a rebound in Canadian and U.S. equity markets.

Ahead of Friday’s jobs data, bond prices could get influenced by Bank of Canada Governor David Dodge who will appear before a parliamentary committee on Thursday.

The two-year bond slid 13 Canadian cents to C$101.32 to yield 3.552 percent. The 10-year bond declined 48 Canadian cents to C$100.53 to yield 3.932 percent.

The yield spread between the two-year and 10-year bond moved to 38.0 basis points from 38.2 at the previous close.

The 30-year bond dropped C$1.04 to C$114.49 to yield 4.144 percent. In the United States, the 30-year treasury yielded 4.444 percent.

The three-month when-issued T-bill yielded 3.84 percent, up from 3.83 percent at the previous close.

Editing by Rob Wilson

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