CANADA FX DEBT-C$ suffers biggest intraday drop since '08 crash
* Recovers 2 cents from session lows
* Euro zone debt fears help trigger heavy selling
* Speculation errant trade may have added to moves
* Low of C$1.0750 to the US$, or 93.02 U.S. cents
* Bonds rally on risk aversion (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, May 6 (Reuters) - Canada's dollar plunged on Thursday, hitting a near 3-month low against the greenback in its steepest intraday drop since the market crash of 2008, on fears Greece's debt crisis may spread to other euro zone countries and threaten the economic recovery.
The wave of selling, which led to speculation about a massive errant trade, also hit global stock markets and any asset class investors consider risky. [MKTS/GLOB]
The Canadian dollar CAD=D4 skidded to a low of C$1.0750 to the U.S. dollar, or 93.02 U.S. cents -- its weakest level since Feb. 9, and more than 4 U.S. cents below Wednesday's close.
"There was just a sudden burst of risk aversion ... it almost seems as if the risk aversion is just gaining a life of its own," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"It didn't seem as if there were any specific event that triggered this sell-off. The risk aversion was always there, and the market was drifting lower and it just triggered an avalanche."
The Canadian dollar and other commodity-linked currencies began selling off after many investors were disappointed by the European Central Bank's failure to take fresh measures to help stem Greece's debt crisis.
The ECB did not discuss the outright purchase of European sovereign debt, as some had hoped for, but gave verbal support instead to Greece's savings plan. [ID:nLDE6450H7]
"Obviously the political turmoil in Europe is the main focal point and the reason for pessimism right now," said Eric Lascelles, chief Canada macro strategist at TD Securities.
"The systemic risk, the liquidity risk and the credit risk have all spiked and we've seen all risk assets plummet."
The currency's fall was the hardest intraday drop since October 2008, when Lehman Brothers' collapse triggered the worst of the global financial crisis.
The Canadian currency was also battered by the price of oil, a key export, which was down almost $3 around $77 a barrel on worries about lower demand. [O/R]
"What I think we have here is momentum selling. People hit their pain thresholds and everybody has hit the sell button at the same time," said Sacha Tihanyi, a currency strategist at Scotia Capital. "It's a very violent move."
The Canadian dollar closed the North American session at C$1.0523 to the U.S. dollar, or 95.03 U.S. cents, down from Wednesday's finish at C$1.0297 to the U.S. dollar, or 97.12 U.S. cents.
Lascelles noted the worst of the panic quickly abated, particularly in equity markets.
U.S. stocks posted their largest percentage drop since April 2009, with all three major indexes ending down more than 3 percent, while Toronto shares closed lower, but cut a near-4 percent intraday loss earlier in the afternoon. [.N] [.TO]
INVESTORS FLOCK TO BONDS
In contrast to stocks and the dollar, Canadian government bond prices jumped across the curve, adopting their traditional safe-haven role.
The two-year government bond CA2YT=RR climbed 14 Canadian cents to C$99.40 to yield 1.798 percent, while the 10-year bond CA10YT=RR shot up 67 Canadian cents to C$100.32 to yield 3.462 percent.
Canadian bonds have rallied as the European situation has worsened on speculation the bad news could deter the Bank of Canada from hiking interest rates on June 1.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, showed a 58 percent probability the central bank hikes rate next month, down from more than 90 percent late last month. BOCWATCH (With additional reporting by Toronto newsroom; Editing by Jeffrey Hodgson)
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