CANADA FX DEBT-C$ touches 1-week low, tracks falling equities

* C$ at C$0.9988 vs US$, or $1.0012
    * U.S. equities fall as 'fiscal cliff' in focus
    * Canada and U.S. trade deficits narrow on increased exports
    * Canadian housing starts fell in October
    * ECB holds interest rate steady

    By Solarina Ho
    TORONTO, Nov 8 (Reuters) - Canada's dollar retreated to its
weakest level against its U.S. counterpart in more than a week
on Thursday, tracking declining U.S. and Canadian equity
markets, as investors largely overlooked a mixed bag of North
American economic data.
    Wall Street's three major indexes were lower on Thursday, as
investors continued to adjust for upcoming negotiations over the
"fiscal cliff," which overshadowed a batch of positive economic
    Both Canadian and U.S. stocks were hit hard in the previous
session over worries Washington may not reach a deal in time to
avoid the "fiscal cliff."
    "Canada is still extremely highly correlated to the S&P ...
The correlation is still somewhere over 80 percent. They pretty
well run in tandem. For now, it just looks like Canada is
tracking the equity markets," said Darcy Browne, managing
director, foreign exchange sales at CIBC World Markets.
    By early afternoon, the Canadian dollar traded at
C$0.9988 to the U.S. dollar, or $1.0012, weaker than Wednesday's
North American close of C$0.9961, or $1.0039.
    Earlier in the session, Canada's dollar touched a one week
low of C$0.9995, or $1.0005.
    "We're still running into really good selling interest
around this parity level, maybe slightly above," Browne added.
    The Canadian dollar was underperforming against most major
currencies around midday, including the euro, which had touched
a two-month low against the U.S. dollar after the European
Central Bank kept interest rates at a record low and said the
region's economy showed little signs of recovering before the
end of the year.  
    In economic news, Canada's trade deficit fell unexpectedly
in September as exports increased and imports were unchanged,
Statistics Canada data indicated. 
    Trade is a major driver of Canada's economy and analysts
cite the problems faced by exporters, such as a strong Canadian
dollar and weak foreign markets, as reasons for sluggish growth
in recent months.
    "The currency doesn't want to garner any kind of support
from what ordinarily would be a positive report," said Michael
Gregory, senior economist at BMO Capital Markets.
    Less positive for the Canadian economy was a report that
showed Canadian housing starts fell in October as both single
and multiple urban starts slumped. The Canada Mortgage and
Housing Corp's report confirmed the country's once-booming
housing market was slowing further. 
    South of the border, the U.S. trade deficit narrowed last
month as well on increasing exports, suggesting global demand
for U.S. goods was holding up despite the debt crisis in Europe.
    "I think the market is keying in on other things. The big
sell-off in equities yesterday shook the foundation of the
market and people are watching that more than the numbers
today," said Browne.
    Separately, Bank of Canada governor Mark Carney made no
mention of domestic monetary policy or the Canadian dollar in a
speech on Thursday. 
    The price of Canadian government debt mostly fell across the
curve. The two-year government of Canada bond fell 2
Canadian cents to yield 1.088 percent, while the benchmark
10-year bond shed 4 Canadian cents to yield 1.749