Tuesday February 10, 2009 - 22:43:31 GMT
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Reuters - www.reuters.com
Forex Market News - CANADA FX DEBT-C$ tumbles as US bank plan disappoints
* C$ closes near session low of 80.04 U.S. cents
* U.S. bank bailout plan sparks C$ selloff
* Bonds end higher, boosted by safe haven buying
* Bank of Canada defends forecasts, sees rate cut room
(Recasts with comments and closing levels)
By Frank Pingue
TORONTO, Feb 10 (Reuters) - Canada's currency fell 2.4
percent on Tuesday as demand for risky assets diminished after
the release of a U.S. government bank bailout plan that was not
considered enough to shore up the financial sector.
The bailout plan, which overshadowed testimony by Bank of
Canada Governor Mark Carney, rattled North American equities
and the Canadian dollar, with investors rushing into the U.S.
dollar and Japanese yen.
The low-yielding U.S. dollar and yen are typically viewed
as safe-haven currencies. When stocks drop and the risk
barometer climbs, investors often repatriate funds and close
out risky trades funded by these two currencies.
The selloff came immediately after U.S. Treasury Secretary
Timothy Geithner unveiled a plan that was considered by many to
be too vague and not enough to contain a deepening recession.
"It's really a risk aversion story again and the currencies
which have typically benefited over the last week or so are the
ones that are being hurt today," said Amarjit Sahota, chief
currency strategist at HIFX Plc in San Francisco. "They are the
largest movers on the day and I think it's directly related to
the lack of clarity from Geithner this morning."
The U.S. government said it will cleanse up to $500 billion
in spoiled assets from banks' books and support $1 trillion in
new lending. [ID:nLA744901]
But the massive plan did not offer specifics that investors
had been hoping for and could not reinvigorate North American
equity markets, ending a three-session streak of gains for
The Canadian dollar closed at C$1.2462 to the U.S. dollar,
or 80.24 U.S. cents, down from C$1.2164 to the U.S. dollar, or
82.21 U.S. cents, at Monday's close.
Late in the session the Canadian currency had fallen as low
as C$1.2494 to the U.S. dollar, or 80.04 U.S. cents, its lowest
level since Feb. 6.
The currency traded in a narrow range as Carney said during
testimony before a parliamentary finance committee that the
central bank has considerable flexibility to deal with the
economy, including room to cut interest rates. [ID:nN10319579]
His comments did little to alter expectations that the bank
will cut its key interest rate below the current 50-year low of
1.00 percent on March 3.
"The markets are pricing in pretty much another 50 (basis)
point cut in March and that will keep the Canadian dollar on
the defensive in the interim period," said Derek Holt, an
economist at Scotia Capital.
BONDS GET BOOST
Canadian bond prices finished higher but the gains were
muted on shorter-dated bonds given the comments from Carney
which were considered slightly hawkish by some market
During his remarks, the central bank governor defended his
highly questioned forecast for Canada's quick recovery from the
ongoing recession to growth of 3.8 percent next year.
"He had a laundry list of factors that go to support the
bank's view of 3.8 percent for next year," said Mark Chandler,
fixed-income strategist at RBC Capital Markets. "He also stated
that if anything he's dampening the results of what the models
are telling him about the strength next year."
Still, with North American equities rattled by the news of
the U.S. bank bailout plan, investors flocked to the security
offered by government debt.
The interest-rate sensitive two-year bond rose 4 Canadian
cents to C$102.82 to yield 1.162 percent, while the 10-year
bond increased 75 Canadian cents to C$110.15 to yield 2.991
The 30-year bond rallied C$1.40 to C$122.05 to yield 3.731
Canadian bonds underperformed U.S. Treasuries across much
of the curve, with the Canadian 30-year bond yield about 23
basis points above its U.S. counterpart, up from about 15 basis
points on Monday.
(Editing by Jeffrey Hodgson)
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