January 24, 2012 / 10:24 PM / in 6 years

Canadian dollar slides as Greek debt fears weigh

TORONTO (Reuters) - Canada’s dollar weakened against the U.S. currency on Tuesday, pulled lower with the euro and commodity prices as a setback in the latest efforts to restructure Greek debt triggered fresh worries about the stability of the euro zone economy.

Athens needs a deal very soon to ensure it can get its hands on funds from a 130-billion-euro rescue plan drawn up by its European partners and the International Monetary Fund. It needs the money before 14.5 billion euros of bond redemptions come due in March.

The market has already priced in an orderly default whereby private stakeholders would take a 50- to 70-percent haircut on their Greek debt holdings, said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.

“When talks break down you get a little bit more concerned that things aren’t going to evolve that way and you get the chance of a disorderly default coming back on the table,” he added.

That scenario would likely lead to a weaker Canadian currency as investors become more risk averse and throw money into safe-haven bets such as low-yield government bonds and the U.S. dollar.

The Canadian currency closed at C$1.0099 to the U.S. dollar, or 99.02 U.S. cents, down from Monday’s close at C$1.0074 to the U.S. dollar, or 99.27 U.S. cents.

There were signs of hope for Europe, as Markit’s Flash Eurozone Purchasing Managers’ Composite Index (PMI) showed the euro zone economy grew in January for the first time since August, confounding forecasts for a contraction.

“We still think Europe is probably in a recession right now,” Reitzes said. “We have the economy contracting 1 percent in 2012.”

He predicted the debt crisis will continue to weigh on the Canadian dollar for the first half of the year, pulling it as low as C$1.06 against the greenback.

The Greek situation overshadowed solid Canadian retail data that showed sales rose more than expected for the fourth straight month in November, supporting expectations that consumer spending will continue to power Canadian economic growth.

Currency traders were looking ahead to U.S. Federal Reserve Chairman Ben Bernanke’s news conference on Wednesday, which will launch a new Fed practice of announcing interest-rate projections. If it announces a specific inflation target it could have a spillover effect on the Bank of Canada’s monetary policy.

“Unless we’re going to get some new news about rate policy it might just be a little bit more about how the new format works rather than a big market mover,” said Steve Butler, a director of foreign exchange trading at Scotia Capital.

Canadian government bond prices were mostly higher, with the two-year bond up 2 Canadian cents to yield 1.048 percent. The 10-year bond rose 4 Canadian cents to yield 2.083 percent.

Editing by Peter Galloway

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