By Frank Pingue
TORONTO, Aug 13 (Reuters) - The Canadian dollar finished a
touch higher versus the greenback on Monday with the bulk of
its early gains erased late in the session after a small
investment bank said U.S. subprime mortgage problems had made
the Canadian market unfavorable for a commercial paper issue.
Canadian bond prices, with no domestic economic data to
consider, closed higher as the market appeared less certain of
a Bank of Canada interest rate hike next month.
The Canadian dollar closed at C$1.0532 to the U.S. dollar,
or 94.95 U.S. cents, up from C$1.0535 to the U.S. dollar, or
94.92 U.S. cents, at Friday's session close.
The currency hit a session high of C$1.0485, or 95.37 U.S.
cents, as stock markets looked ready to end a recent skid. But
a late selloff knocked North American equities into negative
territory and pulled down the Canadian dollar.
Part of the weakness was blamed on a late announcement by
niche investment bank Conventree Inc. (COF.TO: Quote, Profile, Research), which said the
credit crunch caused by losses in the U.S. subprime sector had
left it unable to replace maturing debt.
That news was enough to unsettle an already fragile
"Any type of news that magnifies the financing issues and
the credit issues that are present is probably not going to be
viewed by the market as being positive," said George Davis,
chief technical strategist at RBC Capital Markets.
"A lot of people are still nervous and taking a nervous
posture ... that kind of news is likely to have a little bit of
a minor negative impact on trading sentiment."
The Canadian currency, which hit 30-year high versus the
U.S. dollar in July, has been hit hard by a diminished appetite
for risk due to unsettled U.S. credit markets.
And with no key economic data due this week for the market
to consider, the Canadian dollar will likely look to commodity
prices and developments in the U.S. subprime saga for further
The likelihood of a major cabinet shuffle by the Canadian
Conservative government on Tuesday is not expected to have much
market impact as the moves are not expected to shift the
government's underlying platform.
BONDS MOVE HIGHER
Canadian bond prices took advantage of recent market
chatter about whether the Bank of Canada will take a pass on a
September rate hike because of the latest market developments.
At its last meeting in July, the Bank of Canada raised its
overnight rate for the first time in more than a year and left
the door open for further increases.
That convinced most Canadian primary dealers that a rate
hike is coming on Sept. 5, but the latest concerns about the
U.S. subprime market could alter those expectations.
"The big question coming out of the last meeting was 'is it
going to be hike in September or a hike sometime in the fourth
quarter?'," said Max Clarke, economist at IDEAglobal in New
York. "However, a lot has happened since then and I think the
market is trying to estimate to what extent the Bank of Canada
still desires another rate hike."
The two-year bond rose 22 Canadian cents to C$98.87 to
yield 4.409 percent, while the 10-year bond jumped 40 Canadian
cents to C$96.35 to yield 4.463 percent.
The yield spread between the two-year and 10-year bond
moved to 5.4 basis points from 1.8 at the previous close.
The 30-year bond gained 38 Canadian cents to C$109.44 to
yield 4.426 percent. In the United States, the 30-year treasury
yielded 5.002 percent.
The three-month when-issued T-bill yielded 4.52 percent,
unchanged from the previous close.