CANADA FX DEBT-C$ ends stronger after strong employment gains

Fri May 11, 2012 4:43pm EDT

* C$ ends slightly higher as job gains offset by global woes

* Canada adds 58,200 jobs in April

* Unexpectedly strong data boosts rate hike bets

* Bond yields jump at short end, underperform Treasuries

By Andrea Hopkins

TORONTO, May 11 (Reuters) - The Canadian dollar closed stronger against its U.S. counterpart on Friday after unexpectedly strong Canadian job gains boosted bets on a rate hike, but global woes tempered gains.

Defying market expectations, Canada added 58,200 jobs in April, mostly full-time, after a whopping gain of 82,300 new positions in March.

The data increased expectations that the Bank of Canada could resume tightening monetary policy this year. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders sharply increased bets on a rate hike in the second half.

Higher interest rates tend to strengthen a country's currency by attracting international capital flows.

"It certainly raises the possibility of the Bank of Canada moving on interest rates sooner rather than later," said Sal Guatieri, senior economist with BMO Capital Markets, which is forecasting a January hike.

The report briefly pushed the Canadian dollar above parity against the U.S. dollar, but market concern over Europe's festering debt crisis boosted safe-haven government debt and the U.S. currency, sending the Canadian dollar back below parity.

Following the Canadian jobs data, the currency climbed as high as C$ 0.9954 versus the U.S. dollar, or $1.0046.

Global stocks retreated on the day amid the continued concern about Europe, while oil prices fell after weak data from China reduced demand expectations.

"We had a fabulous employment report out of Canada which helped strengthen the currency and got us through that all-important parity level again. And we're closing the day looking like an outperformer on the back of that employment release," said Camilla Sutton, chief currency strategist at Scotiabank.

"But the U.S. dollar is broadly stronger to close the day, so that has dragged CAD a little bit closer to parity as we enter the close."

The Canadian dollar gained against all other G10 currencies a nd reached a 2012 high against the Australian and New Zealand dollars. <A UDCAD=>

The Canadian dollar ended the North American session at C $1.0009 versus the U.S. dollar, or 99.91 U .S. cents, up slightly from Thursday's session close at C$1.0017 versus the U.S. dollar, or 99.83 U.S. cents. The currency finished the week down about a half percent.

Canada's currency has been supported since the latter half of April on ramped-up expectations of interest rate hikes by the Bank of Canada. The central bank surprised investors with a more positive domestic economic outlook and an explicit warning that it may have to start raising rates again.

Canadian bond prices ended mixed, but underperformed U.S. Treasuries.

The yield on the two-year Canadian government bond , which is especially sensitive to expectations for Bank of Canada interest rate moves, ro se to 1 .301 percent from abo ut 1.2 26 percent just bef ore the release of the Canadian employment report. <0 #CABMK=>

The benchmark 10-year bond yield retreated to 1 .972 percent.

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