April 5, 2010 / 12:10 PM / in 8 years

Canadian dollar inches towards US$ parity; bonds fall

TORONTO (Reuters) - The Canadian dollar edged closer to parity with the U.S. currency on Monday, rising to a 20-month high as the price of oil soared on bets the global economic recovery is on solid footing.

The currency rose as high as C$1.0010 to the U.S. dollar, or 99.90 U.S. cents, supported by oil prices that rose more than 2 percent to their highest level since October 2008 after recent data showed U.S. payrolls surged in March.

Also supporting a positive view on economic recovery was U.S. data that showed the services sector grew in March at its fastest pace in nearly four years, while pending sales contracts for existing homes rose in February.

“The whole recovery story gaining steam has helped us,” said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

“The story is largely the same: the notion of the recovery taking firmer hold and the notion that commodity prices generally rising are certainly helpful for the Canadian dollar doing well.”

The currency finished at C$1.0028 to the U.S. dollar, or 99.72 U.S. cents, up from Thursday’s Bank of Canada close of C$1.0084 to the U.S. dollar, or 99.17 U.S. cents. Canadian markets were closed on Friday for the Easter holiday.

The Canadian currency’s rally fanned speculation that it will reach parity with the greenback, perhaps as early as this week.

Camilla Sutton, a currency strategist at Scotia Capital, said “parity is imminent”.

“We really do have all the factors lining up for us here,” she said. “We have strong domestic data, we have a very strong fiscal sovereign position and there is an economic global recovery, and that is good for Canada.”

The firm U.S. economic data followed a Canadian GDP report for January that exceeded expectations. The next major focal point for Canada will be Friday’s upcoming employment data for March.

The currency, nicknamed the loonie for the loon, a water bird, depicted on the one-dollar coin, last reached parity with the greenback in July 2008. In November 2007, it climbed to a modern-day high of US$1.1039.

Even if the currency reaches parity with the greenback soon, there are doubts about its ability to quickly hit that 2007 level.

“To go a whole other 10 cents is not the sort of thing you do on momentum, you have to do that on very real economic data and very real sentiment and that’s not in the cards for the near term,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

BONDS MOSTLY UNDERPERFORM U.S.

Canadian bond prices essentially followed the U.S. Treasury market, where benchmark yields rose after encouraging data reinforced the view of a faster pace of recovery and pared safe-haven demand for bonds.

“We definitely had some catch up in Canada to reflect those stronger U.S. numbers. That’s why we’re underperforming the U.S.,” Chandler said.

The two-year government bond fell 20 Canadian cents to C$99.38 to yield 1.833 percent, while the 10-year bond was lower by 89 Canadian cents at C$100.65 to yield 3.666 percent.

Canadian bonds mostly underperformed their U.S. counterparts, with the 10-year yield narrowing to 32 basis points.

Editing by Peter Galloway

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