CANADA FX DEBT-C$ slips as commodity prices weaken on China worries

Reuters

* Canadian dollar at C$1.1086 or 90.20 U.S. cents * Bond prices higher across the maturity curve By Leah Schnurr and Alastair Sharp TORONTO, Feb 25 (Reuters) - The Canadian dollar weakened against the U.S. dollar on Tuesday, pulling back as the biggest drop since October 2011 in the Chinese yuan put a scare into commodity-related currencies such as the loonie.

The Canadian currency had gained in the prior session after several weak days late last week, but fell with other resource-linked currencies including the Australian and New Zealand dollars as strategists feared what the yuan move means for global growth.

Economists and traders suspect China's central bank intervened to add volatility to the yuan in preparation for reform. The yuan's drop extended its fall in the past week to slightly over 1 percent.

The Canadian dollar can be sensitive to developments in China, a major consumer of commodities.

"The tone of the day was defensive and that came after the devaluation in the Chinese yuan, the largest in two years," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

The Canadian dollar had received a boost after Bank of Canada Governor Stephen Poloz said over the weekend that two months of stronger domestic inflation has made the central bank feel a little more comfortable.

The comments reduced some of the speculation that the central bank could sound more dovish at its next meeting in March, and had helped lift the loonie on Monday.

"Today we're just giving a little bit of it back, but so far it's been very, very quiet in FX markets," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The comments, along with last week's stronger-than-expected rise in the inflation rate, "would suggest a pretty neutral environment for the Canadian dollar," said Sutton.

That likely means the currency is somewhat stuck in a range along the lines of where it traded in February between C$1.0911 and C$1.1224, she said.

The Canadian dollar ended the session at C$1.1086 to the greenback, or 90.20 U.S. cents, weaker than Monday's close of C$1.1067, or 90.36 U.S. cents.

With a light economic calendar this week, the Canadian dollar won't have much in the way of domestic catalysts until a report on fourth-quarter gross domestic product is released on Friday.

Growth is forecast to slip to a 2.5 percent annualized rate, though the report may carry less weight than usual as harsh winter weather in parts of Canada in December is expected to have temporarily disrupted activity.

National's Spitz said that with low expectations comes a greater chance of a loonie bounce on the data.

"I think the market is pricing in soft (domestic) data and so the surprise would be an upside surprise," he said.

Canadian government bond prices were higher across the maturity curve, with the two-year up half a Canadian cent to yield 1.024 percent and the benchmark 10-year up 36 Canadian cents to yield 2.482 percent.

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