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TORONTO (Reuters) - The Canadian dollar closed lower against the U.S. currency on Wednesday as investors shied away from risky assets, but a jump in oil prices to $100 a barrel and record high gold prices helped cushion its fall.
Domestic bond prices finished higher across the curve as the latest piece of economic data from the United States upped the chance for a Federal Reserve rate cut this month.
The Canadian dollar closed at US$1.0072, valuing a U.S. dollar at 99.28 Canadian cents, down from US$1.0087, or 99.13 Canadian cents per U.S. dollar, at Monday's close.
The positive commodity backdrop helped propel the Canadian dollar to a session high of US$1.0130, or 98.72 Canadian cents per U.S. dollar, but it reversed course as investors unloaded cyclical currencies like the Canadian dollar.
"Strength in risk-aversion trades, being the unwind of the carry trade and reduction of equities globally, are being met with cyclical currencies being sold off," said Jack Spitz, director of foreign exchange at National Bank Financial.
"What's holding Canada in to some degree is the fact that correlated markets, both crude and gold, are trading at record highs ... but it's not translating into record strength for the Canadian dollar."
Canada is a major producer and exporter of both oil and gold, and the performance of its currency often mirrors the direction of prices for the two commodities.
And even though the currency was unable to cash in on an ideal commodity backdrop on Wednesday, Spitz suggested it could get a boost later in the week if key U.S. data comes in weak and rattles the greenback.
"There are uncertainties and structural weaknesses in the U.S. dollar and the U.S. economy, and I think it will continue to falter," said Spitz.
"The payrolls number that we will see on Friday south of the border will more than likely be soft and will lead to a retracement (in the U.S. dollar) back toward 98 (Canadian) cents."
The move in the Canadian dollar this week may be slightly exaggerated given the relatively thinly staffed trading desks during a holiday-shortened week.
Canadian bond prices finished higher across the curve as the lack of domestic data forced bonds to seek direction south of border where rate cut expectations grew after the latest piece of economic data.
A U.S. report that showed manufacturing weakness stoked recession worries, rattled U.S. stocks and sparked interest in safer government debt.
The Canadian economic calendar is empty until the release of the industrial product price and raw materials price indexes for November on Friday.
The two-year bond rose 22 Canadian cents to C$101.14 to yield 3.623 percent. The 10-year bond jumped 63 Canadian cents to C$100.70 to yield 3.910 percent.
The yield spread between the two-year and 10-year bond was 28.7 basis points, up from 24.2 basis points at the previous close.
The 30-year bond ended up 84 Canadian cents at C$116.40 to yield 4.041 percent. In the United States, the 30-year treasury yielded 4.357 percent.
The three-month when-issued T-bill yielded 3.82 percent, down from 3.86 at the previous close.