CANADA FX DEBT-C$ sags on risk aversion, bonds rally
* Canadian dollar closes at 93.46 U.S. cents
* Hits lowest level since Nov. 3 before rebounding
* Bonds rise sharply in safe haven bid
By Claire Sibonney
TORONTO, May 25 (Reuters) - The Canadian dollar slumped to its weakest level in almost seven months on Tuesday in a broad global selloff of riskier assets, amid growing concern about Europe's debt crisis and the prospect of a Korean military conflict.
Risk aversion dragged down global stocks, the price of oil and commodity-linked currencies including the Canadian dollar, which hit C$1.0854 to the U.S. dollar, or 92.13 U.S. cents, its lowest level since Nov. 3. [MKTS/GLOB] [O/R] [FRX/]
Instead, investors flocked to the traditional safety of the greenback, yen, Swiss franc and gold. [GOL/] [US/]
"It was part of the broader risk aversion theme that we saw unfolding late yesterday in North American trading," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"That whole push saw not only equities but also commodities selling off quite aggressively and taking dollar/CAD above C$1.08"
But the Canadian dollar made up some ground after North American stocks sharply cut losses to end near flat.
"We're starting to see aggressive moves in North American trading and that could go either side."
The Canadian dollar closed Tuesday's session at C$1.0700 to the U.S. dollar, or 93.46 U.S. cents, down sharply from C$1.0593 to the U.S. dollar, or 94.40 U.S. cents, at Friday's finish. Canadian financial markets were closed on Monday for the Victoria Day holiday.
The euro fell to an 8-1/2-year low against the yen and neared a four-year low versus the U.S. dollar after Spain's weekend move to rescue the small CajaSur savings bank sparked worries the euro zone sovereign debt crisis is spreading. [ID:nN25121933]
Meanwhile, North Korea said it was cutting all ties with the South and threatened its wealthy neighbor with military action over alleged violations of its waters off the west coast. [ID:nSGE64O03B]
"Korea probably played into the risk aversion theme but without Europe it wouldn't have been such a significant issue," said Strauss.
The volatility on financial markets brings into question whether the Bank of Canada will start raising interest rates in June. Its next scheduled policy setting is in a week's time.
Central bank rate hike expectations, reflected in yields on overnight index swaps, have fallen hard from April 20 when the Bank of Canada removed its conditional commitment to hold rates at record lows until June.
At that point the market was pricing in more than a 90 percent chance of a June 1 hike, compared with about 45 percent on Tuesday. BOCWATCH
"There are too many moving parts to suggest that the Bank of Canada, at this point in time, is good to go," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Currencies tend to strengthen as interest rates rise as higher rates attract capital flows.
CANADIAN BONDS OUTPERFORM
With rate hike expectations in doubt, Canadian bond prices rallied across the curve, despite U.S. Treasury issues giving up gains as stocks mounted a late rebound. [US/]
Last week, a Reuters survey found all of Canada's primary securities dealers still forecast a rate hike in June, but cautioned the fallout from Europe's debt crisis means a rate increase is not certain. [ID:nN21160493]
"The market is pretty much sitting on the fence," said Strauss.
Bond prices tend to fall when interest rates go up as their low-yielding fixed payments seem less lucrative compared with rising yields on other investments and vice versa.
The two-year government bond CA2YT=RR jumped 5 Canadian cents to C$99.81 yield 1.596 percent, while the 10-year bond CA10YT=RR soared 86 Canadian cents to C$102.00 to yield 3.265 percent. (Additional reporting by Ka Yan Ng; editing by Rob Wilson)
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