CANADA FX DEBT-C$ edges lower as economic worries heighten

Tue Aug 16, 2011 4:34pm EDT

* C$ edges down to C$0.9821 to the U.S. dollar, or $1.0182

* Bond prices rise as stagnant German growth data weighs

* Canada factory sales plunge, Q2 growth to suffer

* Sarkozy-Merkel meeting fails to calm financial markets

* Carney, Flaherty to offer clues on economy on Friday (Updates to close)

By Ka Yan Ng

TORONTO, Aug 16 (Reuters) - Canada's dollar retreated against the U.S. currency on Tuesday, falling back with other risk assets as a French-German summit failed to calm financial markets and data pointed to a slowing world economy.

The pullback came a day after the currency jumped more than a penny alongside a solid rally in equity markets.

But world stocks were pressured from the get-go on Tuesday on data that showed stagnant growth in Europe's powerhouse, Germany, which was followed by figures showing a plunge in Canadian manufacturing sales in June.

"It's a consolidation of sorts this afternoon as equities are lower but are not establishing any specific new ground," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

"The CAD is still a sideways trade until there's a breakout one way or another in equities."

After a meeting on Tuesday, German Chancellor Angela Merkel and French President Nicolas Sarkozy detailed proposals for closer euro zone integration, but that did not include boosting the size of the euro zone's rescue fund or beginning sales of euro bonds. [ID:nB4E7HT04B]

The meeting did not live up to expectations that it might result in a proposal to solve Europe's debt crisis, and that sent stocks, crude oil, and other assets lower. But government bond prices perked up.

The Canadian currency CAD=D4 ended at C$0.9821 to the U.S. dollar, or $1.0182, down from Monday's North American finish of C$0.9799 to the U.S. dollar, or $1.0205.

Canada's two-year bond CA2YT=RR edged up 3 Canadian cents to yield 0.994 percent, while the 10-year bond CA10YT=RR advanced 37 Canadian cents to yield 2.461 percent.

Canadian manufacturing sales for June plunged by a much greater than expected 1.5 percent from May, Statistics Canada data showed on Tuesday, confirming that the economy stalled in the second quarter. Analysts had expected a milder 0.4 percent decline. [ID:nN1E77F0XM]

Weak second-quarter data has been a factor in lowering expectations of Canadian interest rate hikes later this year.

"The weaker data will reinforce expectations for the Bank of Canada to remain on hold for the next couple of quarters," wrote Avery Shenfeld, chief economist at CIBC World Markets, in a commentary.

Canadian policymakers could provide important clues about spending plans and interest rates on Friday when a rare midsummer parliamentary committee meeting examines market instability and foreign debt crises. [ID:nN1E77F1AL]

Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney will testify at the House of Commons finance committee, which is looking into the impact on Canada of foreign economic turmoil.

Canada's big banks now forecast that there will be no rate hikes until next year. [ID:nN1E77B11K] (Reporting by Ka Yan Ng; editing by Peter Galloway)

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