CANADA FX DEBT-C$ ends weaker, tracks falling equities

Thu Nov 8, 2012 4:34pm EST

* C$ ends at C$1.0004 vs US$, or 99.96 U.S. cents
    * U.S. equities fall as 'fiscal cliff' in focus
    * Canada and U.S. trade deficits narrow on increased exports
    * Canadian housing starts fell in October
    * ECB holds interest rate steady

    By Andrea Hopkins
    TORONTO, Nov 8 (Reuters) - Canada's dollar retreated past
parity with its U.S. counterpart and ended the day at its
weakest point in a week as it tracked falling stock markets amid
concern over the U.S. "fiscal cliff."
    Wall Street's three major U.S. indexes extended losses on
Thursday after shedding more than 2 percent on Wednesday as
investors continued to worry about upcoming Congressional
negotiations over some $600 billion in spending cuts and tax
increases due to kick in early next year.  
    "Canada is still extremely highly correlated to the S&P ...
The correlation is still somewhere over 80 percent. They pretty
well run in tandem. For now, it just looks like Canada is
tracking the equity markets," said Darcy Browne, managing
director, foreign exchange sales at CIBC World Markets.
    The Canadian dollar ended the North American
session at C$1.0004 to the U.S. dollar, or $0.9996, weaker than
Wednesday's close of C$0.9961, or $1.0039. It was the weakest
close since Oct. 29.
    "We've been in a risk-off environment for the last couple of
days and the currency has held relatively stable, so it was due
for a little weakness and we got some today," said Mark
Chandler, head of Canadian fixed income and currency strategy at
RBC Capital Markets. 
    The Canadian dollar underperformed against most major
currencies, including the euro, which had touched a two-month
low against the U.S. dollar after the European Central Bank kept
interest rates at a record low and said the region's economy
showed little sign of recovering before the end of the year.
  
    In economic news, Canada's trade deficit fell unexpectedly
in September as exports increased and imports were unchanged,
Statistics Canada data indicated. 
    Trade is a major driver of Canada's economy and analysts
cite the problems faced by exporters, such as a strong Canadian
dollar and weak foreign markets, as reasons for sluggish growth
in recent months.
    "The currency doesn't want to garner any kind of support
from what ordinarily would be a positive report," said Michael
Gregory, senior economist at BMO Capital Markets.
    Less positive for the Canadian economy was a report that
showed Canadian housing starts fell in October as both single
and multiple urban starts slumped. The Canada Mortgage and
Housing Corp's report confirmed the country's once-booming
housing market was slowing further. 
    South of the border, the U.S. trade deficit narrowed last
month as well on increasing exports, suggesting global demand
for U.S. goods was holding up despite the debt crisis in Europe.
 
    Separately, Bank of Canada Governor Mark Carney repeated
warnings made on Wednesday about a possible recession in Canada
if Washington does not avoid the so-called fiscal cliff. Policy
makers have "flexibility" to deal with that if it happens, he
said. 
    "That did capture some attention," noted RBC's Chandler.
    While a comprehensive agreement to avoid the automatic
spending cuts and tax increases of the so-called fiscal cliff is
possible, a more likely scenario is for political leaders to
find a temporary fix to buy time until the new Congress and
Obama are sworn in, which is in January. 
    The price of Canadian government debt rose across the curve.
The two-year government of Canada bond was up half a
Canadian cent to yield 1.075 percent, while the benchmark
10-year bond added 28 Canadian cents to yield 1.714
percent.
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