Thursday, 2 August 2012

CANADA FX DEBT-After nearing US$ parity, C$ sinks on ECB news

Thu Aug 2, 2012 4:41pm EDT

* C$ ends at C$1.0072 vs US$, or 99.29 U.S. cents 
 * Currency soared to 99.98 U.S. cents ahead of ECB 
 * Sank to session low of C$1.0085 on ECB disappointment 
 * Bonds higher across curve; TD cuts yield forecasts 

 By Jennifer Kwan

TORONTO, Aug 2 (Reuters) - The Canadian dollar pulled back from near parity with the U.S. currency to close weaker on Thursday after European Central Bank President Mario Draghi disappointed investors by not unveiling immediate measures to combat the euro zone debt crisis. 

Market expectations were high heading into a news conference by Draghi after he recently said he would do "whatever it takes to preserve the euro." Many investors thought this would mean purchases of Italian and Spanish bonds. 

However, Draghi stopped short of providing quick action. Instead, he said the ECB will draw up a mechanism in the coming weeks to make outright purchases to stabilize stressed euro zone borrowing costs.  

"Expectations got a little inflated. Draghi deflated those expectations," said John Clinkard, chief economist at Deutsche Bank Canada. 

Global stock markets and the euro tumbled and the Canadian dollar touched C$1.0085 versus the greenback, or 99.16 U.S. cents, its weakest in nearly a week. 

"It seems the ECB was caught off guard by the aggressive rhetoric from Draghi last week," said Dean Popplewell, chief currency strategist at OANDA. 

"Draghi came out of the gate swinging. Once the market realized there was no firm action and that this is still a work in progress ... risk-off was again applied rather quickly." 

The Canadian dollar ended at C$1.0072 against the U.S. currency, or 99.29 U.S. cents, pulling back from a session high C$1.0002, or 99.98 U.S. cents reached as Draghi began the press conference. On Wednesday, the currency finished at 99.48 U.S. cents. 

The Canadian dollar has traded at a lower value than its U.S. counterpart since mid-May and parity is seen as a key psychological level. 

Avery Shenfeld, chief economist at CIBC World Markets, said he expects that by September the ECB will be in a better position to announce the details. 

The disappointment follows Wednesday's statement by the Federal Reserve, in which the U.S. central bank said the economy was weaker but left policy on hold. 

The Fed stopped short of offering new monetary stimulus even as it signaled further bond buys could be in store, sending riskier assets lower. BONDS HIGHER 

The latest flight from risk drove Canadian bond prices higher across the curve. The two-year bond rose 5 Canadian cents to yield 1.067 percent, and the benchmark 10-year bond rose by 37 Canadian cents to yield 1.672 percent. 

The uncertain global outlook prompted TD Economics to lower its forecasts for Canadian government bond yields on Thursday. 

TD now sees the 10-year yield falling to 1.55 percent in the third-quarter after hitting a record low of 1.565 percent last month. 

The bank also sees the 30-year yield, which hit 2.194 percent last month, reaching a record low 2.15 percent this quarter. The 30-year yield was at 2.25 percent on Thursday.