* Rally in commodity prices key driver behind C$ rally
* Talk of M&A interest also helps to bolster currency
* Bond prices rattled by talk of recovery in economy
By Frank Pingue
TORONTO, Jan 23 (Reuters) - The Canadian dollar shot to its
highest level in more than a week versus the U.S. dollar on
Friday, bolstered by a sharp rally in prices for key Canadian
exports and speculation of merger-related interest.
Canadian bond prices finished lower across the curve due to
a combination of supply concerns and comments from the Bank of
Canada earlier this week that the economy would recover faster
than many had expected.
The Canadian dollar closed at C$1.2312 to the U.S. dollar,
or 81.22 U.S. cents, up from C$1.2537 to the U.S. dollar, or
79.76 U.S. cents, at Thursday's close.
A late-session rally helped power the currency to its
highest level since Jan. 14 and allowed the Canadian dollar to
exit the week with a 1.4 percent gain. That marked a sharp
turnaround from earlier in the week when it was down as much as
Canada is a key exporter of oil and gold, so a 4 percent
surge in gold prices to break above the $900 an ounce level and
a 6 percent jump in oil prices paved the way for the jump.
"What's behind the Canadian dollar's rally is certainly
correlated markets ... gold and crude, but certainly the bounce
in crude has been favorable to the Canadian dollar," said Jack
Spitz, managing director of foreign exchange at National Bank
"There are are also rumors of corporate flows that are in
the marketplace and yet the fundamentals are still skewed in
favor of Canadian dollar weakness."
Early in the session the Canadian dollar turned lower, a
move spurred by an inflation report that supported predictions
for more Bank of Canada interest rate cuts. Oil prices were
also lower early in the session.
Some currency experts suggested the Canadian dollar likely
backed away from its session high of C$1.2267 to the U.S.
dollar, or 81.52 U.S. cents, because of concern over the
weakened state of the global economy and how that could weigh
on demand for the commodities that Canada exports.
"The resiliency of this move was somewhat shocking given
the backdrop that's going on," said David Watt, senior
economist at RBC Capital Markets. "The global economy still
doesn't look like it's at a great stage for commodity
currencies to do spectacular."
BONDS DROP ON ECONOMIC RECOVERY TALK
Canadian bond prices all ended lower as talk from the Bank
of Canada that the economy will surface from this recession
faster than it from previous recessions extended a recent
bearish tone toward secure assets like government debt.
In a quarterly economic outlook released on Thursday, the
central bank said the Canadian economy will shrink during the
first half of 2009 before returning to growth in the third
quarter, a scenario several experts considered too rosy.
A slide in the bigger U.S. Treasury market also influenced
Canadian bonds. Dealers fled U.S. bonds on concerns about the
impact of the large amount of new debt that is expected to be
issued in the United States in coming years to fund government
programs to stimulate the economy.
"The whole MPR update and the somewhat snappy recovery that
they are forecasting have been weighing on the Canadian (bond)
market," said Mark Chandler, fixed income strategist at RBC
"At the very long end of the market it's more a perception
about supply. Canada was insulated to some degree but it's
beginning to work against us as well."
Chandler also said the stimulus measures that are expected
to be unveiled next week when Canada's Conservative government
unveils its annual budget also weighed on sentiment.
The two-year bond dropped 21 Canadian cents to C$102.70 to
yield 1.264 percent, while the 10-year bond fell 63 Canadian
cents to C$11.62 to yield 2.826 percent.
The 30-year bond shed 85 Canadian cents to C$123.55 to
yield 3.658 percent. In the United States, the 30-year Treasury
yielded 3.317 percent.
(Editing by Peter Galloway)
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