TORONTO (Reuters) - The Canadian dollar fell 0.9 percent against the U.S. dollar on Monday as risk aversion resurfaced as the dominant theme in the markets after Lehman Brothers Holdings Inc LEH.N filed for bankruptcy protection, giving a bid to the greenback and weakening commodity prices.
Canadian bond prices rallied with the larger U.S. market as investors moved out of equities and into more secure government debt.
At 9:44 a.m. EDT, the Canadian dollar was at C$1.0712 to the U.S. dollar, or 93.35 U.S. cents, down from C$1.0611 to the U.S. dollar, or 94.24 U.S. cents, at Friday’s close.
Lehman Brothers Holdings filed for bankruptcy protection early on Monday after failing to finance all the risky bets it made, mainly in real estate, making it the biggest casualty so far of the global credit crisis.
Adding to the worries, Merrill Lynch agreed to be taken over and the U.S. Federal Reserve broadened the collateral it would accept from investment banks for direct loans.
“Right now, we’re seeing a spike in risk aversion over the mounting uncertainty about the global growth outlook,” said George Davis, chief technical strategist at RBC Capital Markets.
“A lot of people are concerned that given the sharp rise in risk aversion, there is going to be a lot of repatriation of funds and it’s become a lot more difficult to obtain financing in U.S. dollars because of the credit dislocation, so that makes the U.S. dollar that much more in demand.”
Commodity prices were also affected by the market turmoil, which was seen dampening demand. Canada is a major exporter of many key commodities, including oil and gold, and its currency is often influenced by moves in their prices.
The price of U.S. crude oil fell as much as $7 to $94.13 a barrel. There was no visible damage to U.S. refineries after Hurricane Ike, adding more softness to crude prices.
“The Canadian dollar tends to be a fairly pro-cyclical currency, so when the market is very positive on the global growth outlook, the Canadian dollar tends to do well, and vice-versa,” Davis said.
Canadian bond prices rallied along with U.S. Treasuries on a flight to safety bid as investors fled equities for the more secure bond market.
“Canadian bonds are rallying very sharply, but less so than the U.S., underperforming because the problem is a made in the U.S. problem, but does filter through to Canada in indirect and direct channels via trade and financial ties and so on,” said Eric Lascelles, chief economics and rates strategist at TD Securities.
“Keep in mind Canadian corporations obtain about a quarter of their financing from the U.S. and so if the U.S. market is closed for business, that does have implications for Canada too.”
The odds of a Fed interest rate cut when it meets on Tuesday were boosted by the financial uncertainty, adding to the bid in Treasuries.
The Bank of Canada put out a statement saying it supports the Fed’s liquidity initiatives, and will provide liquidity to the Canadian markets when needed.
The two-year bond rose 40 Canadian cents to C$100.33 to yield 2.595 percent, while the 10-year added 45 Canadian cents to C$105.73 to yield 3.546 percent.
The yield spread between the two-year and 10-year bond was 89.3 basis points, up from 82.0 basis points at the previous close.
The 30-year bond gained 50 to C$116.40 for a yield of 4.030 percent. In the United States, the 30-year Treasury yielded 4.215 percent.
The three-month when-issued T-bill yielded 2.27 percent, down from 2.39 percent at the previous close.
Reporting by John McCrank; Editing by Peter Galloway