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Wednesday August 11, 2010 - 23:24:20 GMT
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Forex News - CANADA FX DEBT-C$ slides to 3-wk low, bonds soar on gloomy data

4:33pm EDT

* C$ falls to 95.67 U.S. cents, up from session low

* Bond prices soar on flight to safety

* Canada trade deficit widens; to drag on Q2 growth (Updates to close)

By Ka Yan Ng

OTTAWA, Aug 11 (Reuters) - The Canadian dollar slid to its lowest level in nearly three weeks on Wednesday, while bonds surged, as a spate of disappointing indicators, including widening North American trade deficits, left investors worried about the global economic recovery.

Canada posted a June trade deficit of C$1.13 billion nearly four times expectations, while the U.S. monthly trade gap widened by 19 percent to $49.9 billion, the biggest shortfall since October 2008. [ID:nN15446129] [ID:nN11208864]

"It was a double whammy of bad news for the currency," said Sal Guatieri, senior economist at BMO Capital Markets.

"Canada's trade report showed a considerable widening in our trade deficit, partly because of a drop in exports, and the weak U.S. trade report will fan fears of a faltering U.S. economic recovery, which will raise concerns about further weakness in Canadian exports."

As a result, the Canadian currency, already under pressure from pessimistic outlooks from the U.S. Federal Reserve and Bank of England, as well as weak Chinese economic data, fell more than a penny after breaking a key technical level of C$1.04 early in the session, and stayed well below it.

The currency CAD=D4 finished at C$1.0453 to the U.S. dollar, or 95.67 U.S. cents, recovering from its session low of C$1.0475 to the U.S. dollar, or 95.47 U.S. cents, its weakest level since July 22.

It was off more than a penny from Tuesday's finish at C$1.0323 to the U.S. dollar, or 96.87 U.S. cents.

David Bradley, director of foreign exchange trading at Scotia Capital, said the Canadian dollar may be "particularly vulnerable" to a slower global economy since it is sensitive to factors such as commodity prices and may also track equity markets, which could extend declines.

He said a close beyond C$1.0410 to the U.S. dollar could set up a test of C$1.0725 to C$1.0750. These levels have not been seen since late May and would be a reversal from late last week when the currency looked set to approach parity with the greenback, a level it has not seen since April.

A climb towards parity is probably on hold for now, as analysts said it was more likely that Canada's dollar could stumble further in the near term as worrying global economic data dims investor appetite for so-called growth currencies. [ID:nN11262027]

BONDS PRICES TAKE FLIGHT

Canadian bond prices extended their gains, particularly rate-sensitive short-dated issues, which shot higher as market players recalibrated their views on the global economy and shifted to the security of government debt issues.

Risky assets fell out of favor, with North American stock indexes losing between 2 and 3 percent. [ID:nN11241585]

"We're seeing a flight to quality today because of the rotation out of risky assets and a reappraisal of the Bank of Canada's tightening trajectory," said Fergal Smith, managing market strategist at Action Economics.

Market pricing, measured by yields on overnight index swaps, fell to around a 50 percent chance of quarter-point rate hike in September from around 58 percent before the day's data. BOCWATCH

The two-year bond CA2YT=RR jumped 18 Canadian cents to yield 1.352 percent, while the 10-year bond CA10YT=RR added 52 Canadian cents to yield 2.972 percent.

An auction of two-year government of Canada bonds attracted decent demand, producing a bid-to-cover ratio of 2.523 that was close to the recent average. [ID:nN11232264] [CA/AUC]

In new issues, Rogers Communications (RCIb.TO: Quote, Profile, Research, Stock Buzz) sold C$800 million in 30-year debt at nearly 251 basis points over the comparably benchmark government bond. [ID:nN11223710] [ISU-CA] (Additional reporting by Claire Sibonney; editing by Rob Wilson)

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