December 30, 2009 / 2:55 PM / 8 years ago

Loonie hits one-week low, hurt by greenback rally

TORONTO (Reuters) - The Canadian dollar fell more than one U.S. cent on Wednesday, hit by a broad-based U.S. dollar rally in a session which also saw thin trading and the surprise suspension of the country’s Parliament.

The unit moved from a 2-1/2 month high hit on Tuesday to a one-week low early in the session, with many traders taking advantage of the shortened week to go on holiday.

The currency held lower after news that Canadian Prime Minister Stephen Harper is planning to have Parliament suspended until early March, giving the minority Conservative party political advantages but bringing an angry backlash from a sidelined opposition.

Political uncertainty tends to be negative for a country’s currency. The Conservatives need support from at least one other party to stay in power, but no election is expected in the near future.

“The Canadian dollar was already weakening ahead of that. I would say it has been a bit of a short-term negative and of course it’s been exacerbated by the fact that there’s not much liquidity,” said George Davis, chief technical analyst at RBC Capital Markets.

The Canadian dollar ended at C$1.0553 to the U.S. dollar, or 94.76 U.S. cents, down from C$1.0438 to the U.S. dollar, or 95.80 U.S. cents, at Tuesday’s close.

The greenback gained across the board on Wednesday, hitting its highest since late September against the Japanese yen as it benefited from year-end flows in thin trade and from the view the U.S. economy is on the road to recovery.

After a technical point was triggered on Tuesday, market players took the Canadian currency to a high not seen since October 20 at 96.47 U.S. cents, but the move was short-lived.

Thin trading conditions will likely make for further swings the rest of the holiday-shortened week.

“It was a little bit overdone. Expectations as to Canada holding better levels sub-C$1.04 is probably unrealistic at this point in time. There’s not enough participants in the market to support those levels just yet,” said C.J. Gavsie, managing director of foreign exchange sales at BMO Capital Markets.

“We do believe going forward into early to mid-January we will retest those levels. If we do see them by the end of this week it’s only going to be on sharp flows that are probably going to recoil.”

BOND MARKETS DRIFT

With no major Canadian economic data on tap this week, Canadian bond prices were little changed, much like their U.S. counterparts after a seven-year U.S. bond auction. It was the last leg of this week’s three U.S. debt offerings totaling $118 billion.

“You had a pretty decent auction in the U.S. but there’s nothing obviously driving markets at this time,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

Lascelles said the market impact of the suspension of Parliament had been largely overshadowed by other factors.

“It’s not something that changes the structure or ultimately the long-term risk profile of the Canadian economy, the political scene or the Canadian dollar,” he said.

The two-year Canadian government bond was up 2 Canadian cents at C$99.67 to yield 1.428 percent, while the 10-year bond was flat at C$101.10 to yield 3.611 percent.

Canadian government bonds had a mixed performance against U.S. issues, with the Canadian 10-year yield 18.1 basis points below its U.S. counterpart, compared with 18.6 basis points the previous session. Short- to mid-dated issues outperformed.

Editing by Jeffrey Hodgson

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