C$ rebounds with equities, but risks remain

TORONTO: The Canadian dollar edged up against the US currency on Thursday as oil prices and equity markets rebounded, though gains were moderate as concerns over the European debt crisis and global economic growth weighed.

Bond prices fell as equity markets were solidly higher.

US crude futures gained and the S&P 500 and Nasdaq rose more than 3 percent by late morning. Toronto's main stock index also climbed into positive territory after an early selloff.

"Things have calmed down a little bit," said John Curran, senior vice-president at CanadianForex.

At noon (1600 GMT), the Canadian dollar was at C$0.9891 to the US dollar, or $1.0110, up from Wednesday's North American close at C$0.9948 to the US dollar, or $1.0052. Canada's two-year bond fell 14 Canadian cents to yield 0.927 percent, while the 10-year bond sagged 70 Canadian cents to yield 2.408 percent.

Curran said the Canadian dollar was still a choice currency by sovereigns for reserves while healthy corporate demand was also a supportive factor.

But this was "balanced by the risk-off scenario and the rate hike expectations, which have been lessened due to the Fed's actions and recent poor Canadian data," he said.

Slumping exports propelled Canada to a much larger trade deficit than expected in June, data showed on Thursday, which will likely slash second-quarter growth to well below already modest predictions.

The data followed Tuesday's dovish statement by the US Federal Reserve, which upped expectations the Bank of Canada will keep its interest rates lower for longer, with markets even betting on a rate cut by year-end.

Canadian overnight index swaps, which are based on expectations for the Bank of Canada's key policy rate, have fully priced in odds of a 25 basis point rate cut later this year on mounting fears of a global slowdown.

But strong US jobs data on Thursday took some of the focus away from renewed fears about the health of the euro zone banking system.

"We have to see if the world can bring itself back from the edge here, which I think we will be able to do," said Curran. "I think we should level off with the risk factors."

The Canadian dollar has managed to stay above parity with the greenback since briefly dipping below a one-for-one footing on Tuesday as worries intensified about the twin US and European debt crises.

"Things usually overshoot in panic situations like we've just had. That we haven't gone back (below parity) is a solid positive for the Canadian dollar," said Curran.

Copyright Reuters, 2011