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Monday January 21, 2008 - 21:31:17 GMT
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Forex Market News - Loonie near 4-month low on equity selloff

Mon Jan 21, 2008 9:28am EST

By Frank Pingue

TORONTO (Reuters) - The Canadian dollar fell to a 4-month low versus the U.S. dollar on Monday as a selloff in global stocks and lower oil prices shook the domestic currency ahead of a widely expected Bank of Canada rate cut on Tuesday.

Domestic bond prices were higher across the curve as the latest piece of Canadian economic data missed expectations and nagging concerns about the U.S. economy extended the recent appetite for safe-haven bonds.

At 9:15 a.m., the Canadian dollar was at 96.87 U.S. cents, valuing a U.S. dollar at C$1.0323, down from 97.33 U.S. cents, or C$1.0274, at Friday's close.

Earlier, the Canadian dollar fell to 96.77 U.S. cents, or C$1.0334, its lowest level since Set. 14, as the combination of risk aversion, lower commodity prices and falling equity markets took its toll on the domestic currency.

Investors tend to unwind carry trades in periods of risk aversion, and the Canadian dollar, which like carry trade currencies is largely commodity-driven, is often pulled along.

"With the risk aversion we've also seen commodities come under pressure and that's hot it filtered through to the Canadian dollar," said Matthew Strauss, senior currency strategist at RBC Capital Markets. "It's not a great surprise that the Canadian dollar again today is under pressure with the equity markets down globally."

Since a 17.5 percent rise versus the greenback in 2007, the Canadian dollar has fallen 4 percent due largely to concerns about what impact a global slowdown could have on Canada given the nature of its exports.

A weak string of domestic data and lower commodity prices have also played a key role in shaking the Canadian dollar, which has fallen for three straight weeks.

Further moves for the currency on Monday could be limited ahead the Bank of Canada's monetary policy announcement on January 22, which primary dealers unanimously expect will be a 25 basis point cut in the overnight rate to 4.00 percent.

"I think the major direction will come from the Bank of Canada," said Strauss. "It's widely expected they will cut 25 basis points so eyes will be on the statement afterward."


Canadian bond prices were all higher as dealers moved into secure assets like government debt given expectations for the Canadian economy to slow in 2008 because of a U.S. downturn.

And while the market has all but priced in a Bank of Canada rate cut on Tuesday, the accompanying statement is expected to offer a dovish tone and that is also supporting bond prices.

"There is some risk of a larger move but certainly the bank will maintain an easing bias and keep the door open for further rate cuts in March and possibly beyond," said Sal Guatieri, senior economist at BMO Capital Markets.

Earlier, Canadian data showed wholesale trade rose 0.3 percent in November, missing the median forecast of analysts in a Reuters poll looking for a 0.5 percent gain.

Other key reports due this week include the Bank of Canada Monetary Policy Report Update on Thursday and the CPI report on Friday.

The overnight Canadian Libor rate LIBOR01 was at 4.2817, percent, down from 4.3450 percent on Friday.

Friday's CORRA rate was 4.2582 percent, up from, 4.2486 on Thursday. The Bank of Canada publishes the previous day's rate at around 9:00 a.m. daily.

The two-year bond was up 15 Canadian cents at C$102.00 to yield 3.129 percent. The 10-year bond rose 28 Canadian cents to C$101.97 to yield 3.748 percent.

The yield spread between the two-year and 10-year bond was 61.9 basis points, up from 57.4 basis points at the previous close.

The 30-year bond increased 36 Canadian cents to C$116.20 to yield 4.051 percent. In the United States, the 30-year Treasury yielded 4.284 percent.

The three-month when-issued T-bill yielded 3.55 percent, down from 3.61 percent at the previous close.

(Editing by Renato Andrade)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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