Canada dollar hits 33-year high after retail data

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(Reuters)

TORONTO (Reuters) - The Canadian dollar roared to a 33-year high against the U.S. dollar on Tuesday after domestic retail sales data for August beat expectations.

Domestic bond prices were mixed amid optimism in the equities markets and renewed jitters in the credit markets.

At 9:46 a.m. (1346 GMT), the Canadian dollar was at 96.74 Canadian cents to the U.S. dollar, or US$1.0337, up from Monday's close of 98.04 Canadian cents to the U.S. dollar, or US$1.0199.

The currency rose to US$1.0390, its highest level since June 1974, after the retail sales figures were released.

Firmer equities markets overseas had already helped the Canadian dollar recover all of its losses on Monday, when the currency took its biggest one-day hit in two years.

Retail sales, which rebounded by 0.7 percent in August, gave the unit an extra push.

"We saw a nice recovery in the volume of retail sales and it suggests that consumer spending for all of the third quarter will be a mild positive, adding slightly to GDP (gross domestic product) growth," said Doug Porter, deputy chief economist at BMO Capital Markets.

"The main point is that the consumer held up very well in the middle of the market turmoil in August."

A jump in car sales bolstered retail sales in August, though it wasn't enough to offset a total decline of 1.9 percent over the previous two months, said Statistics Canada.

The overall sales data slightly exceeded analysts' expectations of a 0.5 percent increase, but excluding auto sales, the data came in as expected.

The Canadian dollar may have more room to climb if the U.S. Federal Reserve decides to cut its key fed funds rate at the end of the month.

"It's not a foregone conclusion, but it seems to me that the balance of opinion has shifted back in favor of the Fed cutting next week," said Porter.

U.S. housing data due on Wednesday and Thursday may provide more hints on the future direction of U.S. interest rates.

BONDS DIP

Canadian bond prices were mixed, gaining on the long end on a flight to safety bid amid concern about credit markets, but falling on the short end due to the firmer equities markets.

The dip on the short end is "basically a reflection of what we saw with equities markets and overnight as well," said Mark Chandler, fixed income strategist at RBC Capital Markets.

Meanwhile, the long end suffered after an analyst said in a note that Merrill Lynch's fixed income business could cost the brokerage $1 billion in profit next year as it may reduce its exposure to bond trading.

In Canada, the next economic report will be the October Business Conditions Survey, due on Friday.

The overnight Canadian Libor rate fell to 4.550 percent from 4.5583 percent on Monday. The Bank of Canada targets 4.50 percent of the overnight rate.

Monday's CORRA rate , the weighted average on Canadian repurchases, rose to 4.5095 percent, from 4.4882 percent on Friday. The Bank of Canada publishes the rate at around 9 a.m. daily.

The two-year bond fell 1 Canadian cent to C$100.13 to yield 4.182 percent, while the 10-year bond added 2 Canadian cents to C$97.58 to yield 4.310 percent.

The yield spread between the two-year and 10-year bond moved to 12.5 basis points from 12.8 at the previous close.

The 30-year bond rose 12 Canadian cents to C$110.57 to yield 4.365 percent. In the United States, the 30-year Treasury yielded 4.360 percent.

The three-month when-issued T-bill yielded 3.96 percent, up from 3.93 percent at the previous close.