Commodities lift Canadian dollar, bonds mixed

TORONTO (Reuters) - The Canadian dollar rose against a softer U.S. dollar on Thursday, as record high oil and gold prices gave the commodity-linked currency some support, but gains were limited on concerns that the U.S. economic slowdown could soon spill over into Canada.

Domestic bond prices rose on the short end on news of more credit market stress and some weaker-than-expected U.S. data.

The Canadian dollar closed at US$1.0146, valuing a U.S. dollar at 98.56 Canadian cents, up from US$1.0099, or 99.02 Canadian cents per U.S. dollar, at Wednesday’s close.

During the session, the currency hit a high of U.S. 1.0206, valuing a U.S. dollar at 97.98 Canadian cents.

The price of crude oil rose to a record $111 and gold prices surged above the $1,000 mark, as weakness in the greenback prompted investors to buy the commodities as a hedge against an economic slowdown.

Canada is a major producer of oil and gold and its currency was buoyed by the commodities’ strength.

But the Canadian dollar’s inability to make stronger gains given the commodity backdrop, the weak greenback, a favorable U.S.-Canada interest rate differential, and a raft of strong recent domestic data, suggests a weaker currency in the months to come, said Shaun Osborne, currency strategist at TD Securities.

“Risk aversion is still simmering under the markets here, despite the slightly better mood in the markets today, and the risk of a spillover from the U.S. slowdown is still very much in the forefront of people’s minds in terms of the outlook for Canada.”

Osborne said he expects the Canadian dollar to fall gradually versus the U.S. dollar over the next couple of quarters and to end up between 94 and 95 U.S. cents by the end of the year.

About 40 percent of the Canadian economy is export-oriented and the U.S. takes in more than three-quarters of Canadian exports.

Bank of Canada Governor Mark Carney reiterated in a speech to the Toronto Board of Trade that the country’s economy is taking a hit from the global credit turmoil and more interest rate cuts will likely be required.

However, he also added that Canada money markets are healthier than in most other countries.

Carney offered no hint as to the size of the next interest rate cut on April 22.


Canadian bond prices rose on the short end on a safe haven bid as the credit crunch claimed another victim and data showed the wallets of U.S. consumers were tightening.

Bonds unwound some of their gains towards the end of the session, however, especially on the long end.

“It looks like the market has given back some of those gains as equities have come back a bit after S&P’s announcement that there might be a light at the end of the subprime tunnel,” said Sal Guatieri, senior economist at BMO Capital Markets.

Standard and Poor’s said writedowns for large financial institutions are likely past the halfway point, easing investors’ nerves after a deluge of bad news in recent months.

In the latest example, Amsterdam-listed fund Carlyle Capital Corp CARC.AS, an affiliate of U.S.-based buyout firm Carlyle Group, said the credit crunch caused it to default on about $16.6 billion of debt.

That sent global stock markets down and increased demand for government debt.

A weaker than expected U.S. retail report followed, ramping up concern of a recession in the world’s biggest economy.

The two-year bond was up 10 Canadian cents at C$102.83 to yield 2.543 percent. The 10-year bond rose 9 Canadian cents to C$103.77 to yield 3.516 percent.

The yield spread between the two- and 10-year bond was 97.3 basis points, up from 91.1 points at the previous close.

The 30-year bond fell 11 Canadian cents to C$116.49 to yield 4.033 percent. In the United States, the 30-year Treasury yielded 4.448 percent.

The three-month when-issued T-bill yielded 3.30 percent, up from 3.20 percent at the previous close.