CANADA FX DEBT-C$ strengthens on U.S. budget talks hopes

Mon Dec 17, 2012 5:05pm EST

* C$ at C$0.9837 vs US$, or $1.0166
    * Touches C$0.9882, or $1.0119 earlier, weakest since Dec 10
    * C$ hits 2012 high against yen
    * Strategists bullish on safe-haven C$
    * Bond prices drift lower across the curve

    By Solarina Ho and Claire Sibonney
    TORONTO, Dec 17 (Reuters) - The Canadian dollar strengthened
against the greenback on Monday after earlier touching a
one-week low as optimism over U.S. budget talks helped support
the commodity-linked currency.
    U.S. President Barack Obama and top Republican John Boehner
met at the White House on Monday as hopes rose that Washington
will be able to head off steep tax hikes and spending cuts that
could push the economy into recession next year. 
    Aides from both parties said they were optimistic that a
deal could be reached in the coming days, with Boehner edging
closer to Obama's demand to raise taxes on the wealthiest
Americans.
    In return, Obama is considering a measure that would slow
the rate of growth of Social Security retirement benefits by
changing the way they are measured against inflation.
    "The needle is going to oscillate based on the tenor of
headlines as they pertain to the fiscal cliff," said Jack Spitz,
managing director foreign exchange at National Bank Financial.
     "With Obama and Boehner meeting and continuing to meet then
there's some cautious optimism around the deal getting done and
that cautious optimism will likely translate itself into
USD/CAD." 
    The Canadian dollar finished at C$0.9837 versus the
U.S. dollar, or $1.0166, stronger than C$0.9865, or $1.0137, at
Friday's North American session close.
    "(The Canadian dollar) has been grinding higher, but it does
need a catalyst to continue. The market undertone is still the
same as over the last week," said Rahim Madhavji, president at
Knightsbridge Foreign Exchange.
    Earlier, the currency touched C$0.9882, or $1.0119, its
weakest level since Dec. 10.
    The Canadian dollar was outperforming all major currencies,
including the Japanese yen, hitting its strongest level since
May 3, 2011 following a landslide election victory for Japan's
Liberal Democratic Party, which is committed to aggressive
monetary easing.
    Spitz said C$0.9800 was the next key level for Canadian
dollar strength.
    
    BULLISH ON CANADA
    Over the medium term, many market players remain bullish on
the Canadian dollar.
    Top economists and strategists from RBC Capital Markets said
in their 2013 global outlook that the commodity-driven currency
should remain stronger than parity over the next year on
historically elevated commodity prices, higher interest rates
and demand from foreign investors and central banks.
    "The increasing trend of seeing the Canadian dollar being
used as a reserve currency by global central banks is adding an
additional new stream of buying of Canadian dollars and that is
actually adding to the strength of the Canadian dollar over the
foreseeable future," said Nick Chamie, RBC's global head of
foreign exchange strategy.
    The currency's growing reputation as a safe-haven was
supported by data showing international investors bought C$13.3
billion in Canadian securities during the month of October.
 
    Canadian government bond prices slipped across the curve,
with the two-year bond losing 4 Canadian cents to
yield 1.150 percent, and the benchmark 10-year bond 
shedding 31 Canadian cents to yield 1.824 percent.
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