TORONTO (Reuters) - The Canadian dollar strengthened in thin trade on Friday as investors headed back to riskier assets, hopeful that leadership change will put Italy back on the path to fiscal health and avoid a full-blown euro zone crisis.
Global equities surged more than 2 percent and the euro rallied against the dollar after an Italian vote on economic reforms eased fears that its debt burden would jeopardize the euro zone’s future.
The Canadian dollar climbed more than a cent in the risk-on trade, hitting a session high C$1.0107 to the U.S. dollar, or 98.94 U.S. cents, before settling back slightly.
“It looks like the recent political moves in Europe have boosted risk sentiment slightly, but I think what you’re seeing are moves in a very thin market,” said John Curran, senior vice president at CanadianForex, a commercial foreign exchange dealing firm.
“People are just squaring things up going into this weekend. There’s a lot of event risk in the next couple of days.”
Canadian bond markets were closed for the Remembrance Day holiday.
At 4 p.m. (2100 GMT), the Canadian dollar was at C$1.0112, or 98.89 U.S. cents, according to Thomson Reuters data, well above Thursday’s Bank of Canada close at C$1.0177 to the U.S. dollar, or 98.26 U.S. cents.
It had weakened as far as C$1.0232 to the U.S. dollar, or 97.73 U.S. cents, overnight, before strengthening on the risk-on sentiment in the wake of the approval of austerity measures by Italy’s Senate.
Italy became the latest focus of a still uncontained crisis that pushed the bond yields of the region’s third-largest economy sharply higher this week. Investors have feared it could be the next country in the euro zone to need a bailout.
Curran said in a note that C$1.0280 is a key U.S. dollar resistance level, while the C$0.9980-C$1.0050 zone should provide support.
Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London, said markets remained focused on Italy, hoping for a positive transition to a new emergency government to be formed within days, ending the reign of Prime Minister Silvio Berlusconi.
Former European Commissioner Mario Monti is widely expected to take over as head of a broad-based national unity government, a move many investors would welcome.
“We’re assuming that come early next week we’ll have a smooth transition from Mr. Berlusconi to Monti, who as a technocrat not beholden to the electorate, and as an EC insider, can take the requisite decisions and get Italy back on the right path,” Stretch said.
Italy’s Senate approved austerity measures demanded by the European Union that will now go to the lower house, where they are expected to be passed on Saturday. That vote will trigger the resignation of Berlusconi.
Editing by Jeffrey Hodgson