Canadian dollar slips on U.S. economic outlook

Canadian dollar slips on U.S. economic outlook
Wed Mar 26, 2008 5:07pm EDT

By John McCrank

TORONTO, March 26 (Reuters) - The Canadian dollar slid lower against the U.S. dollar as investors were loath to bet on the currency, given Canada's heavy dependency on the waning U.S. economy.

Domestic bond prices, with no Canadian economic data to influence direction, ended mostly higher along with the larger U.S. market.

The Canadian currency closed at C$1.0188 to the U.S. dollar, or 98.15 U.S. cents, down from C$1.0173 to the U.S. dollar, or 98.30 U.S. cents, at Tuesday's close.

Early on in the session, rising oil prices helped the currency climb to C$1.0095 to the U.S. dollar, or 99.05 U.S. cents, which marked its highest level in a week.

Canada is a major oil producer and exporter, and rising oil prices have been a major factor in the currency's 60 percent rise since 2002.

But the currency slipped from its intraday high, even as oil prices pushed higher, due to concerns that the growing economic softness in the United States would weaken global growth and cut demand for commodities.

"The U.S. data has certainly deteriorated over the last week and that is weighing on the NAFTA bloc, as well as the procyclical currencies," said Camilla Sutton, currency strategist at Scotia Capital.

The worst performers among major currencies were the Canadian dollar and the Mexican peso, along with the commodity-linked New Zealand dollar.

A report showing U.S. durable goods orders fell in February was the latest bad news from south of the border. The data, which is a key gauge of companies' appetites for investment, came on the heels of U.S. reports that showed dwindling consumer confidence and eroding home prices.

The United States is by far Canada's biggest trading partner and while many areas of the economy are decidedly more robust than the corresponding U.S. sectors, a slowdown in the world's largest economy will hit Canada, Sutton said.

"Certainly our growth will be weighed down because of what's happening in the U.S., along with the strong Canadian dollar," he said.

Over the medium term, however, Canada is seen weathering the storm, partly because of its relatively low inflation rate, which leaves the Bank of Canada room to cut interest rates to stimulate the economy.

In a recent Reuters poll, the majority of Canada's primary securities dealers said they expect the central bank to cut interest rates by 50 basis points to 3 percent when it meets in April.

BONDS MIXED

Canadian bond prices were mostly higher, in line with the larger U.S. market as there was no domestic data to influence direction.

"The risks of a recession in the U.S. are much higher following today's durable goods orders numbers," said Carlos Leitao, chief economist at Laurentian Bank of Canada.

Those increased risks fed the demand for safe-haven government debt, he said.

Canada's economic calendar is bare until the January gross domestic product report, due on Monday. Market focus next week will be on the March jobs report due April 4.

The two-year bond was up 13 Canadian cents at C$102.65 to yield 2.621 percent. The 10-year bond increased 11 Canadian cents to C$104.16 to yield 3.465 percent.

The yield spread between the two- and 10-year bonds was 84.4 basis points, up from 77.5 points at the previous close.

The 30-year bond dropped 34 Canadian cents to C$117.82 to yield 3.963 percent. In the United States, the 30-year treasury yielded 4.321 percent.

The three-month when-issued T-bill yielded 1.77 percent, down from 1.93 percent at the previous close.