January 16, 2012 / 10:38 PM / in 6 years

Loonie hits 1-year high against euro

TORONTO (Reuters) - The Canadian dollar advanced against the U.S. currency and hit a one-year high against the euro on Monday, helped by higher oil prices and its relative appeal following Friday’s mass ratings downgrade of euro zone member countries.

Canada’s dollar, which touched a one-year high against the euro, was supported by oil’s rise above $111 on worries over supply disruptions in the Middle East after Iran warned about consequences in response to international sanctions. <O/R>

But analysts warned trading volumes were light with the U.S. market closed for the Martin Luther King holiday.

“It seemed to be moving almost tick-for-tick with oil,” said David Watt, senior currency strategist with the Royal Bank of Canada. “There’s not usually that close a correlation unless markets are extremely thin.”

The Canadian dollar finished at C$1.0180 to the U.S. dollar, or 98.23 U.S. cents, up from the currency’s Friday North American close at C$1.0227 to the U.S. dollar, or 97.78 U.S. cents.

The euro also rose off Friday’s 17-month lows against the U.S. dollar, as a fresh round of European debt auctions fared well, buoyed by increased buying from the European Central Bank. Italian five-year bond yields dropped to around 5.77 percent while yields on French treasury bills also eased.

“When the ECB is prepared to spend ... it can cap yields,” said Watt. “It’s basically whether or not the ECB chooses to buy a particular nation’s bonds on a particular day about whether or not that market is going to be able to perform well (or not).”

The Canadian dollar has been moving in an increasingly smaller window since Christmas and Watt said the currency would likely remain in a “corridor” between C$1.0179 and C$1.0244.

The next major event for traders is the Bank of Canada’s interest rate announcement on Tuesday.

The central bank is seen as all but certain to keep its key policy rate at 1 percent, where it has stood since September, 2010, so traders will focus on the language in its accompanying statement.

The central bank is likely to keep a cautious tone, warning about the impact of global problems including Europe’s debt crisis.

It may also raise its 2011 growth forecast after Q3 growth came in well above its expectations. But there is speculation Europe’s woes could prompt it to cut forecasts for 2012.

Canadian government bond prices were down across the curve on Monday with the two-year bond down 8 Canadian cents to yield 0.99 percent. The 10-year bond slipped 12 Canadian cents to yield 1.939 percent.

Editing by Jeffrey Hodgson

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