Illiquid markets and concerns about economic growth combined to nudge the Canadian dollar lower against the US dollar on Friday. Domestic bond prices, with no new North American data to influence direction, ended mostly lower as investors returned to equities markets in search of bargains.
The Canadian dollar closed at US $1.0105, valuing each US dollar at 98.96 Canadian cents. That's down from Thursday's close of US $1.0157 or 98.45 Canadian cents to the US dollar. "There's a lack of liquidity and I think that has as much influence on what's going on in the market today than anything else," said Jack Spitz, director of foreign exchange at National Bank Financial.
US markets closed following the US Thanksgiving Day holiday on Thursday and Japanese markets were closed as well, so volume was much lighter than usual. Finance Minister Jim Flaherty said in a speech he was pleased to see the Canadian dollar back at what he called a more reasonable range after it rose as high as US $1.10.
"With the Bank of Canada citing downside risks as a result of the currency, Flaherty's comments dovetail nicely, and as a result, price action in dollar-Canada is really a function of whether the bank is going to cut on December 4 more than Flaherty's comments in isolation," said Spitz.
A rally in oil and gold prices had little effect on the largely commodity-based Canadian unit. "What's happening now is that the concerns over downside risks to growth and the inference that the Bank of Canada is going to be moving to cut rates on the 4th of December is overriding the appreciation that would be coming from correlated markets," said Spitz.
He added, however, that at this point an interest rate cut by the bank in December is by no means a sure thing. US light crude oil rose to over $98 a barrel as lower temperatures hit the US Northeast. Gold prices rose to over $820 an ounce, as negative sentiment towards the US dollar put the spotlight back on the safe-haven commodity.
BONDS MOSTLY LOWER: Canadian bond prices were mixed, but mostly lower as a rally in North American equities markets undercut the safe haven bid for short dated bonds.
The two-year yield was up slightly, but is still down over 70 basis points since October 5, when it was at 4.303 percent. The lower yield suggests both that the market is pushing the Bank of Canada to lower interest rates, as well as pointing to a general lack of liquidity, said Carlos Leitao, chief economist at Laurentian Bank of Canada.
That is largely because the hangover from the US subprime mortgage crisis refuses to abate and the market wants a remedy of interest rate cuts. Indicative of the mood, bond yields from the two-year to the thirty-year are all well below the Bank of Canada's target of 4.50 percent for the overnight rate.
"The Bank of Canada is not going to cut interest rates by 50 basis points on December 4th. That's just not going to happen." Next week will see an avalanche of data on both sides of the border, as well as earnings from four of Canada's big banks.
The week culminates with the release of Canadian third-quarter gross domestic product numbers on Friday. The report will be the last piece of domestic data ahead of central bank interest rate decisions in Canada on December 4, and the US on December 11.
The two-year bond slipped 8 Canadian cents to C$101.28 to yield 3.593 percent. The 10-year bond fell 6 Canadian cents to C$100.02 to yield 3.997 percent. The yield spread between the two-year and 10-year bond moved to 40.4 basis points, from 43.7 basis points at the previous close.
The 30-year bond gained 18 Canadian cents to C$113.39 to yield 4.203 percent. In the United States, the 30-year treasury yielded 4.460 percent. The three-month when-issued T-bill yielded 3.95 percent, unchanged from the previous close.