October 31, 2011 / 8:50 PM / in 6 years

Canadian dollar ends lower but avoids big stock-market fall

TORONTO (Reuters) - The Canadian dollar ended weaker against its U.S. counterpart on Monday after Japanese intervention in the foreign-exchange market boosted the U.S. dollar, but the currency avoided the bigger selloff that hit global stock markets.

Global equities and commodities fell on renewed worries about the effectiveness of last week’s euro zone plan to stem its debt crisis, and the greenback rose following Japan’s intervention to weaken the yen. Low-risk government bonds also rose.

But while the Canadian dollar weakened slightly, month-end rebalancing and a lull related to the fiscal year-end for Canadian banks kept the exchange rate in a tight range as investors avoided getting caught in relatively thin dealings.

“It was a very uneventful day. The fact that it was Canada bank yearend meant trading was somewhat somewhat subdued,” said Blake Jespersen, director of foreign exchange sales at BMO Capital Markets. “But the currency shrugged off the selloff in the equity markets, so that bodes well for the Canadian dollar in the short term.”

The Canadian dollar ended the North American session at C$0.9967 to the U.S. dollar, or $1.0033, down from Friday’s North American session close at C$0.9919 versus the greenback, or $1.0082.

While the currency briefly weakened back below parity with the U.S. dollar after the Bank of Japan intervened to weaken the yen, it ended October on a relatively high note, having regained its position above the greenback.

The Canadian dollar sank below parity with the U.S. dollar in September and weakened as low as C$1.0658 early in October as fears about global growth and the European debt crisis drove investors to the safety and liquidity of the U.S. dollar.

But the currency has since rallied back to parity as the U.S. dollar has weakened. For the month of October as a whole, the U.S. dollar fell 5 percent against the Canadian dollar, its worst month since a 7.3 percent decline in July 2009.

Stronger-than-expected Canadian economic growth data also boosted the Canadian dollar early Monday.

Gross domestic product climbed 0.3 percent in August from the previous month as oil and gas extraction surged, beating market expectations of 0.2 percent growth. Year-on-year growth was 2.4 percent.

John Curran, senior vice president at CanadianForex, a commercial foreign exchange dealing firm, said markets will contend with plenty of event risk this week, starting with the Reserve Bank of Australia meeting Tuesday, followed by the U.S. Federal Reserve’s open market committee meeting on Wednesday, the European Central Bank on Thursday, U.S. and Canadian employment data on Friday, and G20 meetings at the weekend.

Jespersen said the Canadian dollar would likely have to struggle to gain much more ground due to risk worries and renewed skepticism about Europe’s debt plan.

“I don’t see it strengthening much past the 99-cent level. We may see a run at C$0.9850, but generally speaking, selling the Canadian dollar at these levels is not a bad play given all the event risk that exists over the coming weeks,” he said.

“Really the focus remains on Europe and skepticism about this bailout package and there could be another bout of risk aversion as we get into the next few weeks,” Jespersen added. “As much as markets were looking for reason to rally, I think there is also a bit of a need for caution over coming weeks.”

Canadian government bond prices rose across the curve as equity markets dropped. The two-year bond was up 16.5 Canadian cents to yield 1.006 percent, while the 10-year bond gained C$1.26 Canadian cents to yield 2.285 percent.

Editing by Jeffrey Hodgson and Peter Galloway

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