Canadian dollar weakens to three-week low as markets plunge on Brexit

TORONTO (Reuters) - The Canadian dollar weakened to a three-week low against its U.S. counterpart on Friday as a plunge in global financial markets after Britain voted to leave the European Union weighed on Canada’s risk-sensitive currency.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

The vote to leave the European Union forced the resignation of Prime Minister David Cameron and dealt the biggest blow to the European project of greater unity since World War Two.

U.S. crude CLc1 prices tumbled 4.37 percent to $47.92 a barrel and global stocks slumped as the result raised fears of a broader economic slowdown that could reduce demand.

“It increases the risk that deflation could take hold,” said Patrick O’Toole, vice president, Global Fixed Income, CIBC Asset Management, adding that the result calls into question the EU’s existence.

At 8:12 a.m. EDT (1212 GMT), the Canadian dollar CAD=D4 was trading at C$1.2996 to the greenback, or 76.95 U.S. cents, much weaker than Thursday's close of C$1.2772, or 78.30 U.S. cents.

The currency’s strongest level of the session was C$1.2715, while it touched its weakest since June 3 at C$1.3100.

Strategists had warned before the vote that the chances of a Bank of Canada interest rate cut would jump if Britain votes to leave, noting the result could hit global growth and spell bad news for commodity-exporting countries.

Overnight index swaps moved to imply a 27 percent chance of a Bank of Canada rate cut this year after having been priced for no change in policy before the Brexit result.

Canadian government bond prices were much higher across the maturity curve in sympathy with Treasuries as investors rushed into safe-haven assets.

The two-year CA2YT=RR price rose 23.5 Canadian cents to yield 0.468 percent and the benchmark 10-year CA10YT=RR climbed 150 Canadian cents to yield 1.074 percent.

The Canada-U.S. two-year bond spread shifted 5.5 basis points to -12.9 basis points, its smallest gap since May 3 as Treasuries outperformed.

The reaction by markets has been so “violent” because they had been priced for Britain to remain in the EU, said O’Toole.

Reporting by Fergal Smith; Editing by Phil Berlowitz