CANADA FX DEBT-C$ weakens as Ukraine jitters lift greenback

Mon Mar 3, 2014 5:08pm EST

* Canadian dollar closes at C$1.1084 or 90.22 U.S. cents
    * Bond prices higher across the maturity curve


    By Alastair Sharp
    TORONTO, March 3 (Reuters) - The Canadian dollar weakened on
Monday as safe-haven buying of the greenback increased after
Russian President Vladimir Putin's forces tightened their grip
on Ukraine's Crimea region.
    Data that showed manufacturing activity in China contracted
in February, falling for the third month in a row, added to the
pressure on the Canadian currency. The loonie is sensitive to
economic developments in China, the world's second-largest
economy and a major consumer of resources. 
    The military escalation in Crimea pummeled Russian stocks,
bonds and the ruble on Monday. 
    But Gareth Sylvester, a director at Klarity FX in San
Francisco, said that while a war in Europe would obviously have
a massive impact on the global economy, currency markets are not
yet pricing in a high probability of that happening.
    "In terms of currency market reaction, I think overall it
has been fairly muted," he said.
    Sylvester said it was too early to assess the potential
impact of any further escalation of the Ukraine conflict on
regional natural gas exports or to gauge any macroeconomic
consequences that would create more risk for the loonie.
    The Canadian dollar pared some of its decline on Monday
after figures showed Canadian manufacturers' prices climbed much
more than expected in January, largely due to a weaker Canadian
dollar. But the currency was unable to overcome
market concern about the situation in Ukraine. 
    "We're seeing risk-averse sentiment really dominate price
action this morning," said Scott Smith, senior market analyst at
Cambridge Mercantile Group in Calgary.
    "Investors are really looking toward those safe-haven asset
classes and safety is garnering a premium...which is in turn
dragging the loonie lower."
    The Canadian dollar ended the day at C$1.1084 to
the greenback, or 90.22 U.S. cents, weaker than Friday's close
of C$1.1074, or 90.30 U.S. cents.
    Investors were also turning their attention to the Bank of
Canada's policy announcement later in the week. With the central
bank expected to hold interest rates at 1 percent, investors
will be parsing its statement for any change in language.
 
    Klarity FX's Sylvester said he sees dollar/Canada trading
between C$1.1030 and C$1.1150 after the bank's statement with
the market expecting the central bank might pull back from a
recent dovish tilt. 
    Bank of Canada Governor Stephen Poloz recently said that two
months of stronger inflation in Canada have made the central
bank feel a "little more comfortable".
    "With the CPI data coming in a little better than analysts
were expecting, it's given Poloz and the Bank of Canada a little
more reason to be comfortable in terms of the inflation
picture," Cambridge Mercantile's Smith said.
    "I don't really think they'll be changing either any
language in the statement or their outlook for inflation going
forward," Smith said.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up half a Canadian
cents to yield 0.998 percent and the benchmark 10-year
 up 25 Canadian cents to yield 2.401 percent.
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