* Currency slides as low as 77.41 U.S. cents
* GDP data offers little help to C$
* Bonds bolstered by equity slump, flight to safety (Adds details)
By Ka Yan Ng
TORONTO, March 2 (Reuters) - The Canadian dollar hit a three-month low versus the U.S. dollar on Monday, spurred by renewed risk aversion and the declining price of crude oil.
Much of the day’s action was an extension of the overnight session, where financial woes prompted a flight to the safety of U.S. dollar assets as American International Group posted a big loss amid U.S. government aid for the insurer.
“Most of the Canadian dollar weakness, in honesty, we’d seen before we’d walked in the door,” said Shane Enright, currency strategist at CIBC World Markets in Toronto.
The currency closed at C$1.2914 to the U.S. dollar, or 77.44 U.S. cents, down from Friday’s close of C$1.2723 to the U.S. dollar, or 78.60 U.S. cents. It hit a three-month low of C$1.2918 to the U.S. dollar, or 77.41 U.S. cents, late on Monday afternoon.
The currency briefly pared losses after domestic data showed the economy shrank at an annualized rate of 3.4 percent in the fourth quarter of last year, below market forecasts for a 3.6 percent contraction. [ID:nN02254034]
Markets had been bracing for the worst after Finance Minister Jim Flaherty hinted as much in remarks to the media before the Statistics Canada release.
But it was not long before the better than expected data was shrugged off and investor focus returned to the broader trading environment, where the safety of U.S. dollars were sought and the price of crude tumbled.
Crude, a key Canadian export and a driver of the currency’s movement, was off more than 10 percent at just above $40 a barrel on Monday.
The data cements market expectations that the Bank of Canada will cut interest rates again on Tuesday. The central bank has chopped interest rates by 350 basis points since December 2007.
A Reuters poll last week revealed two-thirds of primary securities dealers forecast the bank would cut its key rate by a half a point to a record low of 0.5 percent.
Regardless of the size of the rate cut or the accompanying central bank statement, the Canadian dollar may be headed for a further slide given the broader market attraction for the greenback.
“On balance, the risk is towards a weaker Canadian dollar but not for anything the Bank of Canada does tomorrow,” said Enright.
Canadian bond prices were higher across the curve, boosted by their safe haven appeal as equity markets tumbled on the back of the AIG news, fueling concern that the financial crisis was deepening.
The TSX slumped more than 5 percent, its biggest one-day drop in three months, while the Dow was down more than 4 percent.
The Canadian GDP data added another layer of support to bond prices as did expectations that four major central banks may cut rates this week to offset the economic weakness.
“All the fundamental news has been bad. There had been expectations as well that four central banks are expected to cut rates this week so that’s underpinning things,” said Mark Chandler, fixed income strategist at RBC Capital Markets.
The Bank of Canada, the Reserve Bank of Australia, the European Central Bank and Bank of England are all expected to cut rates this week.
The interest-rate sensitive two-year bond rose 17 Canadian cents to C$102.93 to yield 1.054 percent, while the 10-year bond rose C$1.13 to C$106.55 to yield 3.001 percent.
The 30-year bond gained C$1.80 to C$124.35 to yield 3.617 percent.
Canadian bonds underperformed U.S. treasuries across most of the curve. The Canadian 30-year bond yield moved to 0.30 basis points above its U.S. counterpart. On Friday, it ended 0.40 basis points below. (Reporting by Ka Yan Ng; editing by Rob Wilson)