CANADA FX DEBT-C$ slips as commodity prices weaken on China worries

Tue Feb 25, 2014 4:51pm EST

* Canadian dollar at C$1.1086 or 90.20 U.S. cents
    * Bond prices higher across the maturity curve


    By Leah Schnurr and Alastair Sharp
    TORONTO, Feb 25 (Reuters) - The Canadian dollar weakened
against the U.S. dollar on Tuesday, pulling back as the biggest
drop since October 2011 in the Chinese yuan put a scare into
commodity-related currencies such as the loonie.
    The Canadian currency had gained in the prior session after
several weak days late last week, but fell with other
resource-linked currencies including the Australian and New
Zealand dollars as strategists feared what the yuan move means
for global growth.
    Economists and traders suspect China's central bank
intervened to add volatility to the yuan in preparation for
reform. The yuan's drop extended its fall in the past week to
slightly over 1 percent. 
    The Canadian dollar can be sensitive to developments in
China, a major consumer of commodities. 
    "The tone of the day was defensive and that came after the
devaluation in the Chinese yuan, the largest in two years," said
Jack Spitz, managing director of foreign exchange at National
Bank Financial.
    The Canadian dollar had received a boost after Bank of
Canada Governor Stephen Poloz said over the weekend that two
months of stronger domestic inflation has made the central bank
feel a little more comfortable.
    The comments reduced some of the speculation that the
central bank could sound more dovish at its next meeting in
March, and had helped lift the loonie on Monday.
    "Today we're just giving a little bit of it back, but so far
it's been very, very quiet in FX markets," said Camilla Sutton,
chief currency strategist at Scotiabank in Toronto.
    The comments, along with last week's stronger-than-expected
rise in the inflation rate, "would suggest a pretty neutral
environment for the Canadian dollar," said Sutton.
    That likely means the currency is somewhat stuck in a range
along the lines of where it traded in February between C$1.0911
and C$1.1224, she said.
    The Canadian dollar ended the session at C$1.1086
to the greenback, or 90.20 U.S. cents, weaker than Monday's
close of C$1.1067, or 90.36 U.S. cents.
    With a light economic calendar this week, the Canadian
dollar won't have much in the way of domestic catalysts until a
report on fourth-quarter gross domestic product is released on
Friday.
    Growth is forecast to slip to a 2.5 percent annualized rate,
though the report may carry less weight than usual as harsh
winter weather in parts of Canada in December is expected to
have temporarily disrupted activity.
    National's Spitz said that with low expectations comes a
greater chance of a loonie bounce on the data.
    "I think the market is pricing in soft (domestic) data and
so the surprise would be an upside surprise," he said. 
    Canadian government bond prices were higher across the
maturity curve, with the two-year up half a Canadian
cent to yield 1.024 percent and the benchmark 10-year
 up 36 Canadian cents to yield 2.482 percent.
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