CANADA FX DEBT-C$ ends weaker on U.S. budget fears, current account data

Thu Nov 29, 2012 4:41pm EST

* C$ closes at $0.9928 vs US$, or $1.0073
    * Top Republican says little progress in budget talks
    * Decent U.S. housing data limits losses
    * Canada's current account deficit hits record high

    By Alastair Sharp
    TORONTO, Nov 29 (Reuters) - The Canadian dollar weakened
against the U.S. dollar on Thursday, hurt by comments from a top
Republican lawmaker that cooled hopes for a deal to resolve a
looming U.S. fiscal crisis, as well as data showing a
near-record current account deficit.
    The weakness in the currency, often a proxy for the
prevailing appetite for riskier assets, was tempered by earlier
data that showed U.S. housing starts hit a four-year high in
October. 
    "We had a few pops here and there, mainly driven off of,
first the data and then speculation on how the fiscal cliff
negotiations are advancing," said Camilla Sutton, chief currency
strategist at Scotiabank.
    "We've definitely had a volatile session, however the
overall range has been fairly tight," she said.
    The Canadian dollar ended trade at C$0.9928 against
the U.S. dollar, or $1.0073, weaker than Wednesday's North
American session close at C$0.9919, or $1.0082.     
    The "fiscal cliff", in which $600 billion of spending cuts
and tax increases are set to kick in early in 2013 unless
Congress brokers a deal, is one of the biggest risks facing the
markets in the final weeks of the year.
    House of Representatives Speaker John Boehner said there was
no progress on Thursday in talks with U.S. Treasury Secretary
Timothy Geithner and criticized President Barack Obama and
Democrats for failing to "get serious" about including spending
cuts in a final deal. 
    Currency and equity markets have in recent weeks gyrated
with each utterance suggesting either progress or a lack thereof
in the fiscal talks.
    
    TALK C$ OVERVALUED
    Another negative for the currency was news a drop in exports
helped push Canada's current account deficit close to a record
high in the third quarter, a development that some analysts said
sends a signal that the Canadian dollar is too
strong. 
    "Despite continued foreign investment inflows into the
Canadian dollar, trade fundamentals continue to suggest
overvaluation," Emanuella Enenajor of CIBC World Markets
Economics said in a note to clients.
    The Canadian dollar is up more than 6 percent versus the
greenback since the end of 2009 and more than 60 percent over
the last decade.
    Citing the big current account deficit and other signs the
domestic economy is struggling, BMO issued a report estimating
that the Canadian dollar, "the titanium of the currency world",
is at least 10 percent stronger than current commodity prices
dictate it should be.
    Benjamin Reitzes, BMO's senior economist and foreign
exchange strategist who co-authored the bank's report, cautioned
that a currency can be misvalued on a fundamental basis for a
very long period of time.
    He said this could be the case for the Canadian dollar until
2015, when the U.S. Federal Reserve is expected to start hiking
interest rates, triggering a gradual U.S. dollar rally.
    Until then, "unless you see some significant global economic
weakness and softness in commodity prices, you're not going to
see any meaningful selloff in the Canadian dollar despite the
fact that we believe it's overvalued," Reitzes said.
    
    MIXED ON THE CROSSES
    According to a recent Reuters poll, many analysts believe
the currency will hold close to parity for the coming year,
helped by Canada's triple-A credit rating and the resulting
inflows of foreign capital. 
    Canada's performance on Thursday was mixed against other
major currencies. It outperformed the Australian dollar
 and the Japanese yen, but underperformed the
euro and British pound.
    Prices for Canadian government debt were higher, with the
two-year bond up 2 Canadian cents to yield 1.082
percent and the benchmark 10-year bond added 10
Canadian cents to yield 1.707 percent.
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