CANADA FX DEBT-C$ set to end 2012 stronger as 'cliff' deal close
* C$ at C$0.9935 versus US$, or $1.0065 * U.S. fiscal talks provide most interest; China data helps * C$ on track for 2.4 percent gain for year By Alastair Sharp TORONTO, Dec 31 (Reuters) - The Canadian dollar ticked higher on Monday, boosted by signs that U.S. politicians were close to a last-minute deal to avert a fiscal crunch of spending cuts and tax hikes. Healthy Chinese manufacturing data also helped, but the focus was on U.S. President Barack Obama and Congressional leaders trying to reach a deal on taxes and spending. The "fiscal cliff" of $600 billion in spending cuts and tax hikes that are scheduled to come into effect if no deal is reached are feared would push the United States, Canada's largest trading partner, back into recession. The Canadian currency, long driven by commodity prices but more recently caught up in the fate of the stock market, was on course to end 2012 with a gain of 2.4 percent versus its U.S. counterpart, according to Bank of Canada data. The Canadian currency moved around sharply in afternoon trade as hints of a deal emerged and when President Barack Obama said a deal was close, but was not done yet. At 3:38 p.m. (2038 GMT) the Canadian dollar was trading at C$0.9935 to the greenback, or $1.0065, compared with C$0.9965, or $1.0035, at Friday's North American close. "From a valuation point of view, the Canadian dollar is looking quite rich at these levels, (but) nothing to suggest it is going to sell off dramatically," said Shaun Osborne, chief currency strategist at TD Securities. Osborne said the cumulative effect of an unprecedented level of quantitative easing this year, in which several major central banks used newly created money to buy bonds, had an oversized effect on currency markets that would likely persist. "The central banks are dictating how markets behave at the moment," he said, pointing out that the excess liquidity had forced yields down and pushed investors into riskier assets. That in turn had limited the effect of economic data on currency flows, he said, with investors leaning more on perceived risk appetite, which ebbed and flowed on developments in the European debt crisis and more recently on the U.S. fiscal cliff. A survey of China's vast manufacturing sector showed growth in December was at the fastest pace since May 2011, pointing to a possible rebound after the slowest year of expansion since 1999. China's appetite for raw materials provides a boost to Canadian resource exports. But Canada still depends most on the United States for its exports, meaning that the risk of a politically induced recession there weighs heavily on the currency. "The No. 1 hurdle that investors are trying to get over is the fiscal cliff situation in the U.S.," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "Depending on how we clear that hurdle, successfully or not, that should set the tone for growth currencies and overall risk sentiment," Manimbo added. The two-year bond was off 3 Canadian cents to end the year yielding 1.142 percent, while the benchmark 10-year bond fell 32 Canadian cents to yield 1.804 percent. The yield curve for government debt flattened over the year, as Canada moved closer to an expected interest rate hike. Volume this week has been very light, with many traders off for the Christmas and New Year's holidays, causing market players to be skeptical of the importance of any sharp moves. Investors will have Canadian employment data to chew over on Friday as markets return to more normal trading levels.