CANADA FX DEBT-C$ edges higher in restrained advance

Wed Aug 17, 2011 5:15pm EDT

* C$ ends up at C$0.9797 to the U.S. dollar, or $1.0207

* Bond prices up as equity strength fades, Europe weighs

* TD pushes BoC rate hike forecast to July 2012 from Jan (Adds details)

By Ka Yan Ng

TORONTO, Aug 17 (Reuters) - Canada's dollar edged higher against the U.S. currency on Wednesday, supported by rallying risk assets, although anxiety over the state of the global economy restrained the gain.

The nervousness, however, helped push up government of Canada bond prices.

Early in the session, the currency rose as high as C$0.9776 to the U.S. dollar, or $1.0229, its highest level in more than a week. It then backed down to near its 200-day moving average around C$0.9810.

From around noon onward, the Canadian dollar held in a modest 27-point range and was an underperformer among major currencies.

"The drivers are probably a little bit mixed up, but all in all we've got a little bit stronger oil prices and stronger equities and a general kind of easing in market fears," said Camilla Sutton, chief currency strategist at Scotia Capital.

"But I think the biggest driver by far is broad-based U.S. dollar weakness."

The Canadian currency CAD=D4 ended the session at C$0.9797 to the U.S. dollar, or $1.0207, up from Tuesday's North American finish of C$0.9821 to the U.S. dollar, or $1.0182.

The price of oil was up on the day, but off early highs, while North American stocks were mostly higher but also off the day's highs.

INTEREST RATES TO RISE, NOT FALL

Investors are looking forward to clues about government spending plans and interest rates this Friday when Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney testify at the House of Commons finance committee, which is looking into the impact on Canada of foreign economic turmoil. [ID:nN1E77F1AL] .

Analysts expect the two men to acknowledge the economic slowdown, but not markedly change their cautious tones.

"I think (Carney) will certainly want to leave the impression that they are not considering actively easing (interest rates) at the present time," said David Watt, senior currency strategist at RBC Capital Markets.

A spate of soft economic data has reduced the already slim chance that the Bank of Canada will raise interest rates this year. Canada's big banks all forecast now that there will be no rate hikes until next year. On Wednesday, TD Securities went further and pushed back its forecast for a Bank of Canada rate hike in January by six months to July.

But the swaps market still sees the possibility that the Bank of Canada's next move, along with many other central banks, will be an interest rate cut because of the mounting fears of a global slowdown. [ID:nN1E77B11K] BOCWATCH

Scotia's Sutton said the rate cut expectations worldwide would probably start to fade in the short term.

BOND PRICES SPIKE

Safe-haven flows to Canadian bonds were also supported by some disappointment that France and Germany, at a summit meeting on Tuesday, had stopped short of increasing the size of the euro zone's rescue fund and had rejected for now the idea of a common euro bond. [ID:nL5E7JG0IH]

Canada's two-year bond CA2YT=RR rose 8 Canadian cents to yield 0.955 percent, while the 10-year bond CA10YT=RR advanced 57 Canadian cents to yield 2.394 percent.

A C$3.5 bln tranche of two-year government of Canada bonds met with solid demand on Wednesday as safe-haven demand remained firm as concern mounted over the state of the global economy. [ID:nN1E77G101] (Reporting by Ka Yan Ng; editing by Peter Galloway)

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