CANADA FX DEBT-C$ wins back some value after January plunge

Tue Feb 4, 2014 4:48pm EST

* Canadian dollar at C$1.1081 or 90.24 U.S. cents
    * Bond prices lower across the maturity curve

    By Leah Schnurr and Alastair Sharp
    TORONTO, Feb 4 (Reuters) - The Canadian dollar recovered
lost ground versus the greenback on Tuesday, as a sharp January
slump left some strategists wondering if near-term risks have
been too harshly judged.
    The loonie, as Canada's currency is colloquially known, has
slipped as economic data points to a healthier recovery south of
the border and the two countries' central banks take divergent
policy positions.
    But the intense selling pressure may have been overdone,
some analysts said, implying that inflation and employment
reports later this week need to show only minor positives to
provoke loonie buying.
    "The massive move lower for the Canadian dollar through
January priced in a lot of dovishness," said Greg Moore, senior
currency strategist at Royal Bank of Canada. "The month of
February is, at the margin, in terms of event risk, tilted
towards Canadian-dollar positive developments."
    Still, many analysts expect the recent respite from loonie
selling to be temporary and see the currency resuming its
downward path.  
    Canadian dollar selling intensified last month as the Bank
of Canada left the door open to an interest rate cut. By
contrast, the U.S. Federal Reserve has begun scaling back its
monetary stimulus, and the U.S. economy is expected to
outperform Canada's this year. 
    The contrast is not absolute, however, with U.S.
manufacturing data on Monday showing activity slowed sharply in
January. 
    The view that the performance gap between the two countries
could be more narrow that some had anticipated gave the loonie
some support on Tuesday, said Don Mikolich, executive director
of foreign exchange sales at CIBC World Markets in Toronto.
    "If the end game is about who is going to tighten rates
first and when, I think any slowdown States-side certainly
doesn't accelerate the timing of any rate hikes in the U.S.
relative to Canada. They may well be timed around the same
period," Mikolich said.
    "If we're just keeping pace with each other, which is what
the data lately has been suggesting, I think we might see a
little bit of a pause before any further Canadian dollar
weakness." 
    The Canadian dollar was at C$1.1081 to the
greenback, or 90.24 U.S. cents, stronger than Monday's close of
C$1.1097, or 90.11 U.S. cents.
    The Canadian dollar touched fresh 4-1/2-year lows last week
but has built some momentum since then as investors consolidate
positions. Data on Friday showed investors had pared back
Canadian dollar short positions in the week ended Jan. 28.
 
    "We see the Canadian dollar now consolidating just below
C$1.11 and I think it does open up a bit of room to test back
down to that C$1.0950 area, where we've seen the previous
bottom," Mikolich said.
    "Most likely this is a short-term trend here. I don't think
we've lost our central bank's bias toward a weaker currency."
    The Canadian economic calendar is light until Thursday when
investors will get data on the trade balance for December. The
closely watched unemployment report is set for Friday, with
hiring forecast to have picked up in January after the Canadian
economy unexpectedly shed jobs at the end of the year.
    Canadian government bond prices were lower across the
maturity curve, with the two-year off 6 Canadian
cents to yield 0.961 percent and the benchmark 10-year
 down 39 Canadian cents to yield 2.345 percent.
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