January 4, 2012 / 9:28 PM / in 6 years

Canadian dollar rally pauses as European fears rise to fore

TORONTO (Reuters) - The Canadian dollar dipped slightly against its U.S. counterpart on Wednesday, reversing some of its initial 2012 gains, as more negative headlines out of euro zone reminded investors that the currency bloc’s woes will remain in focus this year.

One of the latest disappointments came from Italy’s biggest bank, Unicredit, after it was forced to price a rights issue at a huge discount, raising fears that tight credit markets are making it expensive for European banks to raise capital and for euro zone countries to refinance debt.

Meanwhile, a muted benchmark German bond auction left markets unimpressed, weighing on the euro and broader investor confidence.

“Some active reality coming out of the euro zone. We had started the year fairly well in terms of a risk rally but all those EU angst issues and sovereign and financial issues rose to the fore again, a key reason why we remain cautious into early 2012,” said David Watt, senior currency strategist at RBC Capital Markets.

Markets were upbeat on the first trading day of the year on Tuesday, pushing stocks and other riskier assets higher on the back of encouraging global economic data.

In a brisk start to the 2012 debt auction calendar, France will sell up to 8 billion euros of bonds on Thursday. But the key test of investor sentiment comes next week when Spain and Italy, the two countries most exposed to an escalation of the crisis, kick off their funding campaigns.

The Canadian dollar ended the North American session at C$1.0123 versus the U.S. dollar, or 98.78 U.S. cents, down a bit from Tuesday’s close at C$1.0110 to the U.S. dollar, or 98.91 U.S. cents. RBC put near-term U.S. dollar resistance at C$1.0177.

The commodity-driven currency largely ignored a jump in crude prices after a European Union agreement to ban Iranian oil imports sent U.S. crude futures to settle above $103 a barrel.

“When you get spikes in oil due to those geopolitical issues it tends not to have as positive an impact on the Canadian dollar because, although the Canadian dollar is sensitive to oil prices and is a cyclical commodity currency, we also tend to be very much dependent on real factors, demand factors and what’s going on in the global economy,” added Watt.

U.S. data that showed new orders for U.S. factory goods rose solidly in November was also largely ignored.

“Payback a bit for yesterday: you got a big rally pretty much around the world yesterday and now you’re getting a bit of sober second thought,” said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.

“I don’t think the European concerns are gone and as long as they kind of linger there, people are going to be reticent to really go all in on the market.”

Reitzes said euro zone economic data on Wednesday didn’t help market sentiment. The latest set of purchasing managers’ indexes (PMIs) suggests the region is on course for a moderate recession, even though the composite PMI reading was slightly better than expected.

Canadian bond prices were little changed across the curve, outperforming U.S. Treasuries.

The two-year bond was off half a Canadian cent to yield 0.986 percent, while the 10-year bond dropped 10 Canadian cents to yield 2.003 percent.

Reporting By Claire Sibonney; editing by Rob Wilson

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