CANADA FX DEBT-C$ stumbles in biggest weekly drop this year

Fri Feb 10, 2012 4:58pm EST

* C$ ends at C$1.0028 to US$, or 99.72 U.S. cents

* Biggest weekly drop since Dec. 12-16

* Worries over Greek debt deal rattle markets

* Bond prices higher

By Jon Cook

TORONTO, Feb 10 (Reuters) - The Canadian dollar's sustained run against the greenback hit a speed bump on Friday after a key bailout deal for Greece met with fresh resistance, putting the possibility of a disorderly default back on the table.

Just 24 hours after Athens agreed to tough wage and pension cuts demanded by international lenders, the deal looked set to collapse after euro zone leaders imposed further conditions on Greece to receive its next rescue package and the country's far-right leader said he could not vote in favour of the deal.

The timing was precarious, as Greece faces a deadline next week to secure a 130 billion euro ($172.95 billion) bailout from the International Monetary Fund and the European Union to finance massive bond redemptions coming due in March.

The news halted the Canadian dollar's rally, knocking it below parity with the U.S. currency and to its biggest weekly loss this year.

"Strength for the Canadian dollar is probably capped to some extent," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets. "It's tough to see how long that can continue for, considering the global economic headwinds that are out there.

"There's probably more downside than upside," added Reitzes who saw the dollar's near-term range between C$0.99 and C$1.0070 to the U.S. dollar.

The Canadian currency finished at C$1.0028 to the U.S. dollar, or 99.72 U.S. cents, down from Thursday's close at C$0.9956 to the U.S. dollar, or $1.0044. It was the currency's lowest close this month the biggest weekly drop since Dec. 12-16.

At one point on Friday, the currency was down nearly a cent at C$1.0040, before rebounding slightly after a report showed Canada's monthly trade surplus rose to a three-year high of C$2.7 billion in December.

But it was not enough for analysts to alter their view that Canada's economy is slowing, based on recent soft jobs, housing and manufacturing data.

"It's really tough to see where the growth drivers are," said Reitzes. "Households are essentially tapped out, governments are cutting back, business investment is largely all imported and housing is flattening out, so what you have left is net exports."

Canada's currency has largely traded in line with the euro for much of the year, rising above the one-to-one level with the U.S. dollar. But the increased uncertainty over Greece had investors selling riskier currencies and buying the U.S. dollar on Friday.

"The news isn't coming out as expected, so rather than risk some catastrophic news, take some profit on positions," said Michael O'Neill, vice-president of foreign exchange trading at RJOFX Canada.

On Thursday, optimism over a Greek debt deal and strong U.S. jobless numbers led investors to turn their backs on the safe-haven appeal of bonds, pushing some yields to year-to-date highs. The 10-year yield touched a 2012 peak of 2.135 and the 30-year yield reached a high of 2.708 percent.

On Friday, bond prices snapped back across the curve with the two-year bond climbing 4 Canadian cents to yield 1.077 percent. The 10-year bond was up 33 Canadian cents to yield 2.054 percent.

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