January 30, 2012 / 2:37 PM / in 6 years

Canadian dollar rally held at bay by Europe doubts

TORONTO (Reuters) - The Canadian dollar’s recent rally against its U.S. counterpart stalled on Monday, even as it remained within striking distance of parity, as the failure of another round of high-level talks to restructure Greek debt hurt investor sentiment.

<p>A Canadian dollar coin, commonly called a "Loonie" and an American dollar bill are seen in this staged photo in Toronto, March 17, 2010. REUTERS/Mark Blinch</p>

Negotiations between Greece’s private creditors and the government on accepting voluntary losses on sovereign debt carried over through the weekend in Athens. A hoped for agreement, despite stated progress, was not reached before the European Union leaders summit.

“They really need to get their act in gear and start making more progress,” said David Watt, senior currency strategist at Royal Bank of Canada.

“The Greek situation has been ongoing for almost two years now and the market, to an extent, has got a good idea what is eventually going to happen they just want the euro zone leaders to actually do it.”

The lack of a breakthrough initially decreased risk appetite among investors, sending the Canadian currency lower. But it rebounded after hitting C$1.0071, its lowest level since Wednesday.

“We didn’t have further bad news so we’ve got markets slowly starting to claw their way back,” said Watt.

The Canadian dollar finished at C$1.0028 to the U.S., or 99.72 U.S. cents, down from Friday’s close at C$1.0007 to the U.S. dollar, or 99.93 U.S. cents.

The Canadian currency firmed above the one-for-one level with the greenback last week for the first time since the beginning of November after the U.S. Federal Reserve said it would likely keep interest rates near zero until late 2014 and left the door open to further stimulus measures.

Market watchers are focused on a slew of North American economic data coming out this week, starting with Tuesday’s Canadian GDP report for November, which is forecast to show the economy grew 0.2 percent from a month earlier.

That will be followed by January jobs numbers at the end of the week.

Sandwiched in between will be fresh U.S. housing, manufacturing and construction spending data that will allow investors to further gauge the health of the American economic recovery after sluggish fourth quarter GDP data late last week.

“If you get a confirmation that the U.S. economy is improving that could well support the Canadian dollar more than good data out of Canada,” said Charles St-Arnaud, Canadian economist and currency strategist in New York for Nomura Securities International.

He sees the currency trading within a range of C$1.02 to C$0.98 to the U.S. in the near term.

Since the recession, the Canadian economy has maintained its triple-A credit rating and has benefited from increased foreign capital inflows into the bond market.

“Investors who don’t necessarily want to hold European debt and are not sure about holding the U.S., turn to Canada with its triple-A rating and relatively good fiscal situation,” said St-Arnaud.

Canadian government bond prices were mostly higher, with the two-year bond up three Canadian cents to yield 0.992 percent. The 10-year bond rose 43 Canadian cents to yield 1.943 percent.

Editing by Jeffrey Hodgson

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