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* C$ falls as low as 96.19 U.S. cents
* Bond prices lower across curve (Recasts to mid-afternoon)
By Claire Sibonney
TORONTO, July 27 (Reuters) - The Canadian dollar slumped against its U.S. counterpart on Tuesday afternoon, reversing an earlier rally, after data showed U.S. consumer confidence dropped to the lowest level in five months in July, prompting investors to sell riskier assets such as commodities and equities.
Job worries drove July U.S. consumer confidence to its lowest since February, with one in six people surveyed expecting lower income in the next six months, underscoring perceptions of the precarious state of economic recovery. [ID:nN27260375]
Following the data and subsequent drop in North American equity markets and oil prices, the Canadian currency fell more than a penny to C$1.0396 to the U.S. dollar, or 96.19 U.S. cents, down from a five-week high earlier in the day.
"We have been on this risk rally for a while now," said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
"The Dow Jones is now positive for the year, the euro is testing $1.30, the Aussie dollar is testing some key levels, sterling is testing some key levels, and so whenever you get to this point you get the markets wondering 'is this a trend that's supposed to continue or should things fade off'?"
Earlier, riskier assets across the board rose after upbeat corporate earnings from both sides of the Atlantic and upbeat U.S. housing data eased recent concerns that global economic recovery is slowing.
"You wonder who is going to step up to fill the consumption gap, while we've got a number of countries that are well prepared to step into the production gap," Watt said.
"That particular issue when you weigh it down, will affect dollar/CAD specifically because the U.S. is our largest trading partner."
He said that to the extent that the Canadian dollar benefited earlier this year from the idea that the euro zone and China would struggle and the United States would be the source of growth going forward, the currency will now likely suffer to an extent if there's a renewed focus on a U.S. slowdown.
At 1:40 p.m. (1740 GMT), the Canadian currency CAD=D4 was at C$1.0384 to the U.S. dollar, or 96.30 U.S. cents, down from Monday's finish of C$1.0324 to the U.S. dollar, or 96.86 U.S. cents.
Canadian bond prices were lower across the curve, tracking U.S. Treasuries down. [US/]
The two-year bond CA2YT=RR was 6 Canadian cents lower to yield 1.625 percent, while the 10-year bond CA10YT=RR was down 35 Canadian cents to yield 3.266 percent. (Reporting by Claire Sibonney; editing by Peter Galloway)