* C$ hit by lower crude, greenback strength
* Currency slides as low as 77.59 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 briefly edged off a three-month low versus the U.S. dollar but quickly slipped back as the declining price of crude and renewed risk aversion overtook data that showed Canada’s economy contracted less than expected in the fourth quarter.
The currency had fallen to its lowest level since early December, ahead of the GDP data, as 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.
The currency firmed immediately after the domestic data, which showed the economy shrank at an annualized rate of 3.4 percent in the fourth quarter of last year, compared with a market forecast 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.
“The report officially marks a recession,” said Sal Guatieri, senior economist at BMO Capital Markets. “It’s almost as bad as expected. Most areas of spending were down.”
But the impact of the better than expected data was short-lived as investor focus returned to the broader trading environment, where risk aversion was at play and the price of crude oil, a key Canadian export and a driver of the currency’s movement, was off more than 8 percent at just above $41 a barrel.
“Oil’s down. And the guts of the report was soft. The U.S. dollar is up across the board on the risk aversion notion,” said Mark Chandler, fixed income strategist at RBC Capital Markets.
At 10:50 a.m. (1550 GMT), the Canadian dollar was at C$1.2871 to the U.S. dollar, or 77.69 U.S. cents, down from Friday’s close at C$1.2723 to the U.S. dollar, or 78.60 U.S. cents. Earlier, the currency hit a three-month low at C$1.2889 to the U.S. dollar, or 77.59 U.S. cents.
The data cements market expectations that the Bank of Canada will cut interest rates again on Tuesday. A Reuters poll last week revealed two-thirds of primary securities dealers forecast a half-point easing that would take the central bank’s key overnight rate to a record low of 0.5 percent.
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 GDP data added support to the rallying bond prices.
“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 RBC’s Chandler.
The Bank of Canada is one of four central banks scheduled to make its interest rate announcement this week. The Reserve Bank of Australia, the European Central Bank and Bank of England are also expected to cut rates amid the global economic weakness.
The interest-rate sensitive two-year bond rose 11 Canadian cents to C$102.86 to yield 1.091 percent, while the 10-year bond rose 68 Canadian cents to C$106.10 to yield 3.051 percent.
The 30-year bond gained C$1.15 to C$123.70 to yield 3.648 percent. (Reporting by Ka Yan Ng)