CANADA FX DEBT-C$ hits 8-month low on growth fears; GDP in focus

Thu Feb 28, 2013 5:19pm EST

* C$ at C$1.0314 vs US$, or 96.96 U.S. cents
    * U.S. GDP data shows growth slowest since Q1 2011
    * Canada's current account deficit narrows to C$17.3 bln
    * Bond prices rise across the curve

    By Solarina Ho
    TORONTO, Feb 28 (Reuters) - The Canadian dollar touched an
eight-month low against the U.S. dollar on Thursday as bearish
sentiment about the outlook for the Canadian economy kept the
currency under pressure.
    Canada will release fourth-quarter gross domestic product
figures early on Friday, with many investors fearing further
weakness after a string of poor data. 
    "The Canadian numbers have generally been disappointing more
frequently and more aggressively than other data points among
Canada's G7 peers," said Shaun Osborne, chief currency
strategist at TD Securities.
    The GDP data is expected to show the economy contracted in
December and grew at an annualized pace of just 0.6 percent in
the fourth quarter, below the central bank's already reduced
forecast of 1 percent. 
    Osborne noted that the yield premium offered by shorter-term
Canadian bonds over Treasuries has also narrowed. The spread
between the Canadian and U.S. 2-year bond yields narrowed to
just 72 basis points on Thursday from about 95 basis points at
one point in January.
    "That's quite a big shift in a market that tends not to move
that much. Spreads are compressing, yields are eroding against
the Canadian dollar," said Osborne.
    Canadian government bond prices were higher across the
curve, with the yield on the 2-year bond falling to
0.95 percent, near a seven-month low. The 10-year bond
 climbed 18 Canadian cents to yield 1.845 percent.
    The Canadian dollar finished the North American
session at C$1.0314 versus the U.S. dollar, or 96.96 U.S. cents,
more than three-quarters of a cent weaker than Wednesday's North
American close at C$1.0230, or 97.75 U.S. cents. This was also
its weakest level since June 29, 2012.
    The currency began weakening earlier in the session after
data showed the U.S. economy, the biggest single destination for
Canadian exports, barely grew during the fourth quarter. U.S.
growth came in below what economists had expected and slipped to
the slowest rate since the first quarter of 2011. 
    As the day progressed, the U.S. dollar also rose as
investors embraced safety against the backdrop of a political
stalemate in Italy and with the United States only hours away
from sweeping, automatic spending cuts that are expected to take
a toll on the global economy. 
    These factors overshadowed news that Canada's current
account deficit narrowed in the fourth quarter of 2012 on
stronger exports of energy and food products. The C$17.3 billion
deficit was still slightly wider than the C$17 billion forecast.
 
    "We saw a little bit of a relief rally yesterday, but it's
been quickly snuffed out. American GDP data, it's softer than
expected, and that calls into question the North American
recovery," said Adam Button, currency analyst at ForexLive in
Montreal.
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