July 8, 2020 / 8:43 PM / a month ago

CANADA FX DEBT-Canadian dollar rallies, bond yields jump on Ottawa's spending forecast

 (Adds strategist quotes and details throughout; updates prices)
    * Canadian dollar rises 0.7% against the greenback
    * Ottawa forecasts a budget deficit of C$343.2 billion
    * Loonie notches a 2-week high at 1.3493
    * Price of U.S. oil settles 0.7% higher 
    * Canada's 30-year yield climbs 10.7 basis points to 1.097%

    By Fergal Smith
    TORONTO, July 8 (Reuters) - The Canadian dollar strengthened
to a two-week high against its U.S. counterpart on Wednesday and
yields on Canada's long-term debt rose by the most in nearly
four months as Ottawa forecast its largest budget shortfall
since the Second World War.
    The loonie        was trading 0.7% higher at 1.3503 to the
greenback, or 74.06 U.S. cents. It touched its strongest
intraday level since June 23 at 1.3493.
    "Clearly the initial rally was supported by global risk
appetite," said Karl Schamotta, chief market strategist at
Cambridge Global Payments. "But it also looks like the larger
than expected expansion in spending by the federal government in
Canada helped to drive that further."
    Canada's budget deficit is now forecast to hit C$343.2
billion ($254 billion) amid record emergency aid spending in
response to the COVID-19 pandemic. That is far higher than the
C$28.1 billion that Canada's ruling Liberals projected back in
December, before the coronavirus crisis.             
    "Markets are very aware at this point that the demand shock
that we've seen needs to be overwhelmed by government stimulus,"
Schamotta said. 
    Wall Street was bolstered by early signs of an economic
rebound, while the price of oil, one of Canada's major exports,
rose as U.S. gasoline consumption showed signs of a recovery.
U.S. crude oil futures        settled 0.7% higher at $40.90 a
barrel.
    Longer-dated Canadian government bond yields climbed as
Ottawa said it would be "significantly increasing long-term
bonds to lock in funding at historically low interest rates."
    The share of bond offerings allocated to maturities that are
10 years or greater will nearly double in the 2020-21 fiscal
year to 26% of annual issuance, the government's Debt Management
Strategy document said.
    The 30-year             yield rose 10.7 basis points to
1.097%, its biggest increase since March 17.    
    Canada's jobs report for June is due on Friday.


($1 = 1.3506 Canadian dollars)

 (Reporting by Fergal Smith; Editing by Bernadette Baum and
Peter Cooney)
  
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