By Frank Pingue
TORONTO, Aug 9 (Reuters) - The Canadian dollar was rattled
on Thursday as signs that turmoil in U.S. credit markets was
spreading abroad forced investors to flee riskier assets while
domestic housing data also weighed on the currency.
Domestic bond prices, which have been dumped at the hands
of robust economic data for much of the year, rose on the short
end as the safety of government bonds lured investors while
stock markets tumbled.
The Canadian dollar closed at C$1.0565 to the U.S. dollar,
or 94.65 U.S. cents, down from C$1.0487 to the U.S. dollar, or
95.36 U.S. cents, at Wednesday's close.
The bulk of the currency's decline was recorded in the
overnight session after BNP Paribas (BNPP.PA: Quote, Profile, Research), France's biggest
bank, said it froze $2.2 billion worth of funds due to fallout
from the U.S. subprime sector.
The news prompted major central banks, including the Bank
of Canada, to inject funds into money markets to try to calm
credit markets and meet liquidity needs.
For the Canadian dollar, it marked a sharp turnaround from
Wednesday when the currency pushed higher as investors tip-toed
back into carry trades which benefit high-yielding currencies.
"We had a bit of unwinding of the carry trade again which
basically hurt everything except the yen and the franc," said
Doug Porter, deputy chief economist at BMO Capital Markets.
"Canadian dollar is also being hit in the cross current of
concerns about global growth and a bit of a pullback in oil and
other commodity prices well."
In carry trades, investors borrow low-yielding currencies
like the yen to invest in higher-yielding assets like the
Canadian, New Zealand and Australian dollars.
The Canadian dollar encountered more weakness early in the
session as domestic economic data suggesting a steady cooling
of the housing market. July housing starts missed expectations
while new home prices for June were in line with estimates.
But the currency, which hit a session low of C$1.0643 to
the U.S. dollar, or 93.96 U.S. cents, shortly after the housing
data was released, managed to reclaim the bulk of the losses
ahead of a key job report on Friday.
SHORT-END BONDS GET LIFT
Canadian bond prices on the short end got a boost, helped
along by fears of a credit market squeeze that led to cash
injections into money markets by the European Central Bank,
Bank of Canada and the U.S. Federal Reserve.
The jobs data due on Friday, which the market has been
anticipating all week, could have little impact if the headline
number comes in relatively close to estimates.
The Canadian economy is expected to have added 20,000 jobs
in July, compared with a bigger than expected gain of 34,800 in
June, according to a Reuters survey.
"Basically, I think the market's fears about the whole
subprime mess and credit squeeze have just been ramped up a few
notches today," said Porter. "Investors of all stripes are
looking for ultimate safety now and that tends to be at the
short end of the government yield curve."
The two-year bond climbed 22 Canadian cents to C$98.64, to
yield 4.542 percent, while the 10-year bond rose 9 Canadian
cents to C$95.81 to yield 4.534 percent.
The yield spread between the two-year and 10-year bond
moved to -0.8 basis points from -13.2 at the previous close.
The 30-year bond fell 2 Canadian cents to C$109.23 to yield
4.438 percent. In the United States, the 30-year treasury
yielded 5.026 percent.
The three-month when-issued T-bill yielded 4.57 percent,
down from 4.60 percent at the previous close.