December 8, 2011 / 1:58 PM / 6 years ago

Loonie retreats from 5-week high after ECB

3 Min Read

TORONTO (Reuters) - The Canadian dollar slipped from a five-week high against the U.S. dollar amid nervous trade on Thursday, after European Central Bank President Mario Draghi dampened hopes for the euro zone's outlook.

After cutting interest rates by a quarter of a percentage point to 1 percent, Draghi poured cold water on market hopes that the central bank would step up its purchases of euro zone sovereign debt or lend money to the IMF to do so.

He also said new forecasts from the bank showed the currency bloc's gross domestic product could contract by as much as 0.4 percent next year, although he noted it could also grow by as much as 1.0 percent.

At 10:13 a.m., the Canadian dollar stood at C$1.0170 versus the U.S. dollar, or 98.33 U.S. cents, down from Wednesday's North American close at C$1.0103 to the U.S. dollar, or 98.98 U.S. cents.

Shortly before Draghi's comments, the Canadian dollar had rallied to C$1.0052 against the greenback, or 99.48 U.S. cents, its highest level since November 1, boosted by data showing U.S. jobless claims fell to a nine-month low.

"With the negative sentiment that the (Draghi) press conference put in the market, dollar/CAD pretty much followed the same path," said Greg Moore, foreign exchange strategist at TD Securities.

"You can see that the move during the press conference completely overshadowed the U.S. data that came out, sending CAD quite a bit lower," he added, noting further direction will likely come from headlines leading into Friday's European Union summit.

Moore said he saw near-term resistance for the currency pair around C$1.02 to the U.S. dollar.

As EU leaders prepare for a meeting that could determine the fate of the euro zone, many market players were betting that much of the good news that may emerge has already been priced in.

"People are preparing for a worse outcome than expected over the weekend, and that's going to take the wind out of Canada's sails as a risk currency," said John Curran, senior vice-president at CanadianForex.

"You're standing in front of this looming EU conference and the prudent thing to do is shed risk."

Canadian government bond prices rallied across the curve amid the risk-off mood. The two-year bond rose 4 Canadian cents to yield 0.885 percent and the 10-year bond jumped 20 Canadian cents to yield 2.033 percent.

Reporting By Claire Sibonney; editing by Rob Wilson

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