CANADA FX DEBT-C$ ends 2012 stronger as 'cliff' deal close

Mon Dec 31, 2012 4:57pm EST

* C$ at C$0.9925 versus US$, or $1.0076
    * U.S. fiscal talks provide most interest; China data helps
    * C$ gained 2.5 percent versus US$ in 2012

    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.
    Investors fear that the "fiscal cliff" of $600 billion in
spending cuts and tax hikes that are scheduled to come into
effect if no deal is reached 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, ended
2012 with a gain of about 2.5 percent versus its U.S.
counterpart. 
    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.
    It ended the day and the year at C$0.9925 to the greenback,
or $1.0076, according to Thomson Reuters data at 4 p.m. Eastern
(2100 GMT), 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.
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