CANADA FX DEBT-C$ slips as Portugal downgrade drags

Tue Jul 5, 2011 5:19pm EDT

* C$ slips to C$0.9632 to U.S. dollar, or $1.0382

* Canadian bonds mostly higher

By Solarina Ho

TORONTO, July 5 (Reuters) - The Canadian dollar slipped for a second session against the U.S. dollar on Tuesday after a major ratings agency downgraded Portugal and as soft euro zone data and worries about China left investors cautious.

Moody's Investors Service cut Portugal's credit rating by four levels into junk territory, saying there was great risk the country would need a second round of financing before it could return to capital markets. The news added to lingering worries about Greece even as Athens narrowly averted a default.

Adding to the bad news from Europe, growth in the euro zone's dominant services sector slowed to its weakest pace since October, while euro zone retail sales data was also below expectations. [nL6E7I408N]

Media reports about a possible rate rise in China and a Moody's report saying the scale of problem loans at local governments in the country may be much bigger than previously thought further spoiled risk appetite. [nL3E7I507Y]

"A slight risk aversion helped the U.S. dollar, that's why we're down vs. the U.S. dollar," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. "It's not a strong risk-on or risk-off theme -- not as strong as what we've seen over the last month."

The currency CAD=D4 finished at C$0.9632 to the U.S. dollar, or $1.0382, down from Monday's North American session close of C$0.9608 versus the U.S. dollar, or $1.0408. The currency strengthened to as high as C$0.9594 against the U.S. dollar earlier in the day.

Looking ahead, the Canadian dollar is expected by some analysts to find support in the C$0.9675-C$0.9700 range.

"Unless things deteriorate rapidly in Europe or in the equity space in the next couple of days, I think for this week we'll probably struggle to get much above C$0.97," said Shaun Osborne, chief currency strategist at TD Securities.

Employment data on both sides of the border at the end of this week will also be in focus. ECONCA

"We're going to need quite a surprise to get the market moving ... data surprises will become a little bit more important," said Chandler.

Canadian bond prices were mostly higher, mirroring some of the moves by their U.S. Treasury counterparts as the safe-haven appeal of government bonds ended a sell-off [US/].

The two-year bond CA2YT=RR was up 3 Canadian cents to yield 1.566 percent, while the 10-year bond CA10YT=RR was up 15 Canadian cents to yield 3.070 percent. (Additional reporting by Claire Sibonney; Editing by Jeffrey Hodgson)

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