July 12, 2010 / 12:24 PM / 7 years ago

C$ falls with oil; eyes on Bank of Canada

TORONTO (Reuters) - The Canadian dollar fell on Monday due in part to soft oil prices, while investors were slightly cautious about Bank of Canada surveys that showed upbeat business sentiment but worries about the global recovery.

The second-quarter surveys showed businesses were optimistic in their outlook for sales, investment and hiring, but their enthusiasm was tempered by fears that global uncertainties would hurt economic recovery.

In the business survey, companies reported for the first time in two years that past sales activity had improved. But the balance of opinion on future sales -- the difference between the percentage predicting higher sales minus those expecting a drop -- fell to 24 percent from 44 percent in the first quarter.

“The market has been a little cautious in response to the business outlook survey,” said Eric Lascelles, chief Canada macro strategist at TD Securities, referring to the future sales headline.

“The market generally is going to be on pins and needles leading up to the Bank of Canada next week,” he added.

The surveys showed some slowing in the momentum of the recovery overall, but there were certainly enough positive aspects, said Doug Porter, deputy chief economist at BMO Capital Markets.

“The main message is that the recovery still seems to be on solid ground at least in Canada,” he said.

The Canadian dollar finished at C$1.0375 to the U.S. dollar, or 96.39 U.S. cents, down from Friday’s finish at C$1.0337 to the U.S. dollar, or 96.74 U.S. cents. Monday’s drop followed a gain of 2.8 percent last week.

The Bank of Canada’s business outlook and senior loan officer surveys are seen as key reports ahead of the July 20 interest rate announcement.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, showed the market sees an 82 percent chance of a July rate hike.

TD’s Lascelles said a generally “risk off” tone was another key factor pressuring the Canadian dollar.

“It seems to me the motivation is the risk-off trade. The commodity currencies are suffering a little as various commodities ease on the day,” he said.

U.S. crude oil futures ended lower, snapping a three-day winning streak.

The currency touched a session low of C$1.0387 to the U.S. dollar, or 96.27 U.S. cents, as North American equity markets notched a lackluster session following big gains last week.

BONDS HIGHER

Canadian bond prices advanced, reflecting a pause after a sharp move following stellar domestic jobs data on Friday, said Kam Bath, fixed income strategist at RBC Capital Markets.

The economy added a whopping 93,200 jobs in June, easily outstripping market predictions for a 15,000-job gain and contradicting other recent data suggesting Canada’s galloping economic recovery was slowing.

“It’s just a bit of unwinding from last week’s sharp move,” Bath said.

“That strong employment report pretty much bakes in a July rate hike. Really, no one is looking for anything different than that.”

The two-year bond rose 7 Canadian cents to yield 1.683 percent, while the 10-year bond climbed 24 Canadian cents to yield 3.202 percent.

Canadian bonds outperformed their U.S. counterparts across the curve. The Canadian 2-year bond was 103 basis points above its U.S. counterpart, compared with about 108 basis points in the previous session.

Reporting by Jennifer Kwan; editing by Rob Wilson

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