May 30, 2012 / 12:22 PM / in 5 years

Canada dollar hits 4-1/2-month low on Europe, China

TORONTO (Reuters) - Canada’s dollar skidded to a four-and-a-half month low against its U.S. counterpart on Wednesday on worries about Spain’s ailing banking sector and soaring borrowing costs, while China signaled it is not planning a large stimulus package.

Spanish government borrowing costs edged higher and the Madrid stock market hit a nine-year low, with investors rattled by the parlous state of its banking sector fleeing to the relative haven of German bonds.

“Equity markets are negative across the board in Europe and North America so risk sentiment is really not positive,” said Charles St-Arnaud, economist and currency strategist at Nomura Securities in New York.

“There’s concern about the banking sector in Spain given the amount of recapitalization that their system may need. It’ll be a big hit on the fiscal situation in Spain.”

The Canadian dollar hit C$1.0312 versus the U.S. dollar, or 96.97 U.S. cents, its weakest since January 9. At around 10:30 a.m. (1430 GMT), it was at C$1.0301, down from Tuesday’s North American session close at C$1.0229 versus the U.S. dollar, or 97.76 U.S. cents.

Market observers also said investors fled risk after China signaled it does not need massive fiscal stimulus to stabilize growth and calm investors fretting that the global economy may slip back into a similar crisis as 2008-2009.

“The news flow overnight has not been particularly encouraging, so a lot of uncertainty still within Europe and pressure on the peripheral bond markets,” said Shaun Osborne, chief currency strategist at TD Securities.

“I think China downplaying again the potential for stimulus measures have also contributed to this sort of risk-off undertone for the markets but it’s really about watching the headlines and watching what’s going on in Europe.”

Canada’s currency outperformed its commodity-linked cousins including the Australian and New Zealand dollar, but underperformed most of its other G10 currency peers including the Japanese yen.

Against the U.S. dollar, Osborne cautioned that the Canadian dollar could slip to the C$1.05 or C$1.06 area in the next month or two given the Canadian dollar has weakened five big figures, from C$0.98 to C$1.03, in the last four weeks.

Later in the week, the closely watched U.S. jobs report and Canadian growth numbers will provide further direction for currency traders.

Canadian government bond prices picked up across the curve with Canada’s two-year bond up 9 Canadian cents to yield 1.122 percent, while the benchmark 10-year bond climbed 79 Canadian cents to yield 1.790 percent. The 30-year yield hit a record low of 2.326 percent.

Additional reporting by Claire Sibonney; Editing by Chizu Nomiyama

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