CANADA FX DEBT-C$ tumbles on Italy worries, risk aversion

Wed Nov 9, 2011 4:52pm EST
 
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   * C$ ends at C$1.0217 vs US$, or 97.88 U.S. cents
 * Canadian dollar drops 1.3 percent against US$
 * Bond prices climb as Italian yields soar
 (Updates to close, adds comments)
 By Jennifer Kwan
 TORONTO, Nov 9 (Reuters) - The Canadian dollar posted its
biggest loss against the U.S. dollar in just over a week on
Wednesday as the euro zone debt crisis and fears that Italy
would be forced to seek a bailout heightened risk aversion and
prompted a big swing to the safety of the greenback.
 Italian borrowing costs reached a breaking point on
Wednesday after Prime Minister Silvio Berlusconi's insistence
on elections instead of an interim government opened the way to
prolonged instability and delays to long-promised economic
reforms. [ID:nL6E7M93EM]
 "The key drivers started out with Italian yields blowing
out past the 7 percent mark and sending the markets into a
concerted risk-off mentality that sent equities lower across
the board," said Matt Perrier, director of foreign exchange
sales, BMO Capital Markets.
 The euro fell the most in 15 months against the U.S.
dollar, while Canadian and global stocks plunged on fears the
country would be forced to seek a bailout that could overwhelm
the euro zone's finances and push the region into a recession.
[MKTS/GLOB]
 "It has been translated into broad-based (U.S.) dollar
strength on risk aversion here," Perrier said.
 The Canadian dollar CAD=D3 ended the day at C$1.0217
versus the greenback, or 97.88 U.S. cents, dropping 1.3 percent
to notch its steepest decline since Nov. 1. On Tuesday, the
currency finished at C$1.0082 against the U.S. dollar, or 99.19
U.S. cents.
 Despite this, Perrier said the Canadian dollar was "holding
in quite well."
 Analysts say the currency looks set to outperform its
commodity-linked peers and the euro in the near term, citing
Canada's proximity to the still-expanding U.S. economy and the
fact its interest rates are unlikely to fall. [ID:nN1E7A81FZ]
 But on Wednesday, Bank of America Merrill Lynch broke with
other Canadian primary dealers to predict the Bank of Canada
would cut its key policy rate back to 0.25 percent next year
from 1 percent now. BoA Merrill predicted the move would come
in the first quarter of 2012, driven by the impact of the euro
zone debt crisis. [FXN]
 A Reuters poll taken on Nov. 4 showed none of Canada's 12
primary dealers expect a cut, with 7 of 12 predicting a rate
hike next year. [CA/POLL]
 BONDS RALLY
 Canadian government bond prices rose alongside U.S.
Treasuries as investors sough safe-haven assets.
 The two-year bond CA2YT=RR was up 18 Canadian cents to
yield 0.905 percent, while the 10-year bond CA10YT=RR climbed
77 Canadian cents to yield 2.094 percent.
 Elsewhere, Canada's sale of two-year government bonds met
with healthy demand on Wednesday as investors flocked to the
safety of government debt due to concerns about a deepening
euro zone crisis. [ID:nN1E7A81HL]
 "There's a little more heightened risk aversion today than
there was yesterday and as a result people were covering shorts
in the sector," said Ian Pollick, fixed income strategist at
RBC Capital Markets.
 (Editing by Rob Wilson)