Canada's dollar is seen beating non-U.S. peers on Europe's woes

Wed Nov 9, 2011 2:12pm EST
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By Claire Sibonney

TORONTO (Reuters) - Canada's dollar looks set to outperform its commodity-linked peers and the euro in the near term as spiking Italian bond yields ratchet up Europe's debt crisis and threaten global growth.

Analysts say Canada's proximity to the still-expanding U.S. economy - and the fact its interest rates are unlikely to fall - should help it do better than other so-called pro-cyclical currencies, which are closely tied to economic growth and risk appetite.

While the Canadian dollar weakened more than 1 percent against the greenback on Wednesday, it rose against other major currencies, with the exception of the Japanese yen.

Many strategists expect that trend to play out through the rest of 2011.

"I'm anticipating a relatively strong U.S. dollar into the end of the year and in that environment, the Canadian dollar tends to better than the other dollar-bloc currencies and better than the major European currencies," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

"Because there's more downside for the euro, I think that an attractive trade idea would be long Canada dollars, short euros."

The most recent catalyst for fleeing riskier assets came on Wednesday, when global stocks, commodity prices and the euro took a pounding after Italy's 10-year bond yields rose above the precarious 7-percent level. Yields at that level have caused other euro-zone countries such as Greece, Ireland and Portugal to seek bailouts. <MKTS/GLOB>

With a debt burden of about 1.9 trillion euros, Italy is considered too big to bail out, and a default would probably dry out credit, bring Europe to a recession, and drag on global growth.   Continued...