December 8, 2011 / 10:23 PM / 6 years ago

Euro letdown sinks loonie; 30-year yield at record low

TORONTO (Reuters) - The Canadian dollar tumbled nearly two cents against the U.S. currency on Thursday and the yield on Canada’s 30-year bond sank to a record low on deflated hopes that euro zone policymakers would step up action to tackle the region’s debt crisis.

Reuters reported that Germany rejected some measures in draft conclusions of EU heads on Thursday after European Central Bank President Mario Draghi played down expectations the bank would massively step up buying of government bonds after a the crucial summit on Friday.

“This market is so random and headline driven ... if you’re trading this stuff, it’s impossible, it’s like flipping a coin,” said David Bradley, director of foreign exchange trading at Scotia Capital, noting volatile market reaction to the draft headlines.

“The market is going to want to sell any rallies that we see in the euro/dollar which is going to put pressure on the Canadian dollar as well.”

The Canadian dollar ended the North American session at C$1.0226 versus the U.S. dollar, or 97.79 U.S. cents, down more than 1 percent from Wednesday’s North American close at C$1.0103 to the U.S. dollar, or 98.98 U.S. cents. It was the currency’s biggest one-day drop in a month.

Following Draghi’s comments, souring sentiment shoved the currency from a 5-week high to an intraday low of C$1.0235, or 97.70 U.S. cents, its weakest level since November 30.

Earlier in the session, the Canadian dollar had rallied to C$1.0052 against the greenback, or 99.48 U.S. cents, its highest level since November 1, after the ECB cut interest rates to a record low 1 percent and data showed U.S. jobless claims fell to a nine-month trough.

Bradley put the next resistance level for the U.S. dollar against Canada’s around C$1.0290, a 50 percent retracement from the U.S. currency’s highs of November, and said he wouldn’t be surprised to see more greenback strength across the board heading into the year end.

Meanwhile, CIBC World Markets predicted on Thursday that the Canadian dollar will weaken to C$1.08 against its U.S. counterpart, or 92.59 U.S. cents, by the middle of 2012.

“The resource-linked Canadian dollar (like its sister, the Australian dollar) has room to slide further in the coming months, until the crisis fires in Europe are quenched,” CIBC chief economist Avery Shenfeld said in a report to clients.

Looking to Friday, any signs of progress toward closer fiscal integration and more stringent budgetary discipline could temporarily boost market confidence.

“The stakes are pretty high for what needs to be achieved and if there’s a disappointment, we could see some significant downside,” said Greg Moore, foreign exchange strategist at TD Securities, pointing to additional pressure from credit rating agency Standard & Poor’s stark warnings this week on the euro zone.

Canadian government bond prices rallied across the curve amid the risk-off mood, pushing the yield on the 10-year bond below 2 percent to a low not reached in Bank of Canada records going back to 1951.

The two-year bond rose 6 Canadian cents to yield 0.873 percent, while the 10-year bond surged 51 Canadian cents to yield 1.999 percent. Earlier, the 10-year yield plunged as low as 1.978.

The yield on the Canadian 30-year bond hit a record low of 2.573.

Editing by Jeffrey Hodgson

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