* C$ rises to 97.21 U.S. cents
* BHP bid for Potash turns hostile
* Government bond prices rise across much of curve
* Five-year note auction sees solid demand
(Updates to close, adds quotes)
By Claire Sibonney
TORONTO, Aug 18 (Reuters) - The Canadian dollar rallied
against its U.S. counterpart for a second day on Wednesday,
supported by BHP Billiton's (BHP.AX: Quote, Profile, Research, Stock Buzz)(BLT.L: Quote, Profile, Research, Stock Buzz) takeover bid for
Canada's Potash Corp (POT.TO: Quote, Profile, Research, Stock Buzz)(POT.N: Quote, Profile, Research, Stock Buzz).
BHP took the $39 billion takeover offer -- the largest so
far this year -- directly to shareholders on Wednesday, a day
after Potash's (POT.TO: Quote, Profile, Research, Stock Buzz) board rejected it as "grossly
The bid by Anglo-Australian BHP, the world's biggest miner,
has boosted the currency because a successful offer from any
international player would result in the purchase of Canadian
The suitor could either buy Canadian dollars to pay for the
tens of millions of Potash shares held by Canadian investors,
or pay in U.S. dollars and leave the conversion up to
BHP's $130 a share offer has sent Potash stock soaring as
investors anticipate it may become richer.
"One thing that is clear, it seems like the spot market
likes to react first and ask questions later so we've
definitely seen Canada doing better and Aussie underperform on
the back of the news yesterday," said Steve Butler, director of
foreign exchange trading at Scotia Capital.
"It does make a certain amount of sense but I think adding
on a fresh position on the back of this may be a bit premature
because again a lot can happen between now and then if the deal
does close in a couple months."
Analysts said Canada's currency could rise to equal value
with the U.S. dollar for the first time since April if the deal
goes through, though they warned that strength could prove
fleeting given global economic weakness. [ID:nN17146793]
The Canadian dollar CAD=D4 closed the North American
session at C$1.0287 to the U.S. dollar, or 97.21 U.S. cents, up
from Tuesday's finish of C$1.0329 to the U.S. dollar, or 96.81
Butler said intraday moves through the 200-day moving
average at C$1.0320 on Tuesday and Wednesday were a bullish
sign for the Canadian currency and market watchers are now
"After a really tough week last week if stocks continue to
press higher that bodes well for Canada short term," he added.
Butler cautioned, however, that until a Potash deal is
consummated, the market will remain skittish.
Analysts warn the economic backdrop for the Canadian dollar
is shaky, particularly if the U.S. economic recovery remains
tepid. CIBC World Markets on Wednesday said it had trimmed its
forecast for rate hikes and currency strength in Canada as the
economic growth outlook dampens abroad.
Markets are pricing in roughly a 53 percent chance of a
0.25 percent rate hike on Sept. 8. Most of Canada's primary
dealers have forecast a pause in rate hikes in October.
HEALTHY APPETITE FOR BONDS
As evidence of slower growth in both Canada and the United
States has emerged in recent weeks, government bond prices have
rallied as investors seek the relative safety of these assets.
Canada's two-year bond CA2YT=RR was up half a Canadian
cent to yield 1.391 percent, while the 10-year bond CA10YT=RR
added 20 Canadian cents to yield 2.934 percent.
Canada's auction of five-year bonds attracted solid demand
on Wednesday despite competition from Canada Housing Trust's
sale of C$3.55 billion of bonds. [ID:nN18193944]
"You've seen the slower global growth outlook and the
market has helped drive yields lower and the market has gotten
comfortable that the Bank of Canada is going to proceed very
cautiously on its path for its policy normalization," said
said Fergal Smith, managing market strategist at Action
"That's been very helpful for the front of the curve and
the belly of the curve in Canada," he added, also noting data
on Tuesday that showed robust foreign interest in Canadian
bonds in June. [ID:nN17122886]
(Reporting by Claire Sibonney; editing by Peter Galloway