CANADA FX DEBT-C$ hits 1-yr low, month end flows spur volatility

Thu Sep 29, 2011 4:39pm EDT
 
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 * C$ sinks to year-low C$1.0403 vs US$, or 96.12 US cents
 * Month-end, quarter-end flows aggravate losses
 * Europe worries persist despite German vote
 * Bonds prices mostly higher
 (Adds analyst comment, updates levels)
 By Andrea Hopkins
 TORONTO, Sept 29 (Reuters) - Canada's dollar dropped to a
one-year low against its U.S. counterpart on Thursday, hurt by
ongoing fears about Europe's debt crisis and big investors
adjusting currency exposure on portfolios before month- and
quarter-end.
 Global markets were earlier buoyed by a vote by German
lawmakers to beef up the crisis-hit euro zone's bailout package
and better-than-expected data from the U.S. labor market, but
the relief rally did not last.
 Currency dealers said many institutional investors who
suffered stock market losses in the quarter were rebalancing
their foreign exchange exposure, buying the greenback against
the Canadian dollar.
 "Just looking at the performance of the equity market over
the last month, I think most of the rebalancing flows will be
buy dollar-Canada, that's probably why we've seen Canada
underperform currencies like the euro," said David Bradley,
director of foreign exchange trading at Scotia Capital.
 The Canadian dollar CAD=D3 ended the North American
session at C$1.0366 to the U.S. dollar, or 96.47 U.S. cents,
below Wednesday's North American session close of C$1.0326, or
96.84 U.S. cents.
 It was a volatile session. The Canadian dollar touched
C$1.0403, or 96.13 U.S. cents, late in the afternoon, its
weakest point since September 2010, after having climbed as
high as C$1.0256, or 97.50 U.S. cents, after the U.S. data was
released.
 Bradley said the Canadian dollar could weaken further on
Friday, the last trading day of the month and quarter.
 "We can probably test up towards C$1.0450. Really, on the
brink of C$1.04 there is not much resistance until C$1.0675
which is the highs from last summer. It was really gappy when
we were up here before," Bradley said.
 The Canadian currency had initially firmed after Europe
again averted disaster in its debt crisis when German lawmakers
rallied behind Chancellor Angela Merkel to approve a stronger
euro zone bailout fund, known as the European Financial
Stability Facility (ESFS).
 "It was nice to get the German passage of the ESFS bill but
that's hardly the signal that the EU crisis is over. If
anything it is just the start of the next phase of the crisis,"
said David Watt, senior currency strategist at Royal Bank of
Canada.
 Bigger challenges loom for the euro zone now. Financial
markets are already anticipating a likely Greek default and
demanding more far-reaching measures to prevent the crisis that
began in Athens from spreading far beyond Europe and its
banks.[ID:nL5E7KT2WC].
 Initial claims for U.S. unemployment benefits last week
fell to a five-month-low of 391,000, well below economists'
expectations for 420,000 and below the key 400,000 level for
the first time since early August.
 Separately, the U.S. economy grew at annual rate of 1.3
percent, the government said in its final estimate for the
second quarter, up from the previously estimated 1.0 percent.
 That reflected consumer spending and export growth that was
stronger than earlier estimated. [ID:nS1E78S0BT]
 Bond prices were mixed. The two-year Canadian government
bond CA2YT=RR was unchanged in price to yield 0.928 percent,
while the 10-year bond CA10YT=RR lost 10 Canadian cents to
yield 2.206 percent.
 (Additional reporting by Claire Sibonney; Editing by Jeffrey
Hodgson)