By John McCrank
TORONTO, Jan 4 (Reuters) - The Canadian dollar fell to a
two-week low against the U.S. dollar on Friday, after data on
domestic purchasing activity in December came in well below
market expectations, adding to concerns that the U.S. economic
slowdown is spilling over into Canada.
The weak data, along with softer than expected U.S. jobs
numbers, pushed domestic bond prices higher.
The Canadian dollar closed at 99.87 U.S. cents, valuing
each U.S. dollar at C$1.0013. That was down from US$1.0092, or
99.09 Canadian cents per U.S. dollar, at Thursday's close.
For the week, the Canadian dollar was down 2.1 percent,
despite record prices for key commodities.
Both oil and gold hit record highs during the week, with
U.S. crude prices CLc1 topping $100 a barrel and spot gold
prices <XAU=> nearing $870 an ounce.
With Canada a major producer of both oil and gold, strong
commodity prices have traditionally benefited the Canadian
currency. But the worry now is on how much additional pressure
those high prices will add to a faltering U.S. economy.
A significant slowdown in the United States, Canada's
largest trading partner, would undoubtedly have a negative
impact north of the border, said Camilla Sutton, currency
strategist at Scotia Capital.
"We certainly see U.S. housing weakness, and we are seeing
that flow into other areas of the economy, including some
obvious softening in the labor market, and high energy prices
could very well be the tipping point that throws the U.S.
economy ... into much harder times."
A surprisingly weak U.S. jobs report further stoked fears
of a U.S. recession.
"The only time in the past 25 years that the unemployment
rate has increased by this much in a month was in the past two
recessions," BNP Paribas economist Brian Fabbri said in a note.
"Thus, the probability that the U.S. economy is on the
verge of recession, or could already be entering one, has risen
Concerns that the slowdown in the U.S. could spill over
into Canada were amplified by data showing Canadian purchasing
activity fell to its lowest point since December 2001.
"The market was already thinking that growth slowdown in
the U.S. should provide growth slowdown in Canada, and I think
that the timing of the number, even though it is really
second-tier data, really just provided confirmation of that,"
The Ivey Purchasing Managers Index fell to 45.9 in December
from 58.7 in November, indicating activity contracted for the
first time since December 2006.
Bond prices rallied along with U.S. treasuries on the weak
U.S. jobs numbers, and were pushed higher by the Ivey data.
The bad news about the U.S. economy has investors betting
that the Federal Reserve will be forced to cut interest rates
aggressively to prevent a recession, driving up bond prices.
But the rally in bonds may not last, said Eric Lascelles,
chief economics and rates specialist at TD Securities, who said
that if there is a U.S. recession it will be a mild one.
"We've seen the Libor spread in the U.S. come down quite
nicely in the last month, and we've seen commercial paper
spreads narrow generously in Canada, so if we see that
continue, the flight to safety unwinds, and you end up with
quite a few arguments for higher yields."
The two-year bond rose 9 Canadian cents to C$101.25 to
yield 3.560 percent. The 10-year bond was up 24 Canadian cents
at C$100.81 to yield 3.896 percent.
The yield spread between the two-year and 10-year bond was
33.6 basis points, up from 31.4 at the previous close.
The 30-year bond rose 1 Canadian cent to C$115.92 to yield
4.067 percent. In the United States, the 30-year treasury
yielded 4.379 percent.
The three-month when-issued T-bill yielded 3.78 percent,
down from 3.81 at the previous close.
(Editing by Rob Wilson)