February 27, 2009 / 3:07 PM / 11 years ago

CANADA FX DEBT-C$ hits one-month low as risk aversion heats up

* C$ drops below 79 U.S. cents as equities tumble

* Canada’s current account swings to deficit in Q4

* Bond prices rally as weak data sparks interest

By Frank Pingue

TORONTO, Feb 27 (Reuters) - Canada’s dollar skidded to its lowest level in over a month on Friday given the combination of a drop in oil prices, safe-haven flows into the U.S. currency and data that showed Canada’s current account swung into deficit.

Weak stock markets overseas and in North America coupled with the nagging concerns about the global banking system weighed on commodity-currencies like the Canadian dollar as investors flocked to the greenback given its safe-haven status.

“We saw risk aversion increasing quite significantly this morning and consequently commodity-based currencies are under more severe pressure,” said Matthew Strauss, senior currency strategist at RBC Capital Markets. “And the U.S. dollar as a safe-haven benefited from this increase in risk aversion.”

At 9:40 a.m. (1440 GMT), the Canadian unit was at C$1.2682 to the U.S. dollar, or 78.85 U.S. cents, down from C$1.2532 to the U.S. dollar, or 79.80 U.S. cents, at Thursday’s close.

Earlier, the already weakening Canadian currency fell to its lowest level since Jan. 22 in the immediate aftermath of data that showed Canada’s current account went into deficit for the first time in nearly a decade.

The current account deficit for the fourth quarter of C$7.49 billion was wider than the C$4.85 billion deficit forecast by analysts. [ID:nN27257696]

Still, the data only had a temporary drag on the currency, which eventually returned to its pre-data level. The Canadian dollar fell as low as C$1.2703 to the U .S. dollar, or 78.72 U.S. cents, after the data.

“The data itself just confirmed the problems we are facing on the trade front because of the weakening global and U.S. economy,” said Strauss. “But the market reaction was fairly limited as the data are quite dated.”

Oil prices, which fell back after a three-day bull run, pared about 3 percent of their value and continued to drag on the Canadian dollar since oil is a key Canadian export.


Canadian bond prices were higher across, getting a boost from weak equity markets, which dropped on grim economic data and news that U.S. government was taking a large common equity stake in embattled lender Citigroup (C.N).

The Citigroup news sowed more uncertainty over the fate of major U.S. banks and triggered a surge in investor demand for more secure assets such as government debt.

“Weakness in overseas data along with the Citigroup news softened stock markets, especially in Europe, and that’s given a big boost to bonds,” said Benjamin Reitzes, economist at BMO Capital Markets. “So it’s risk off and everyone has charged into bonds.”

Also helping to support bonds was a continuation of weak North American data as the domestic current account data came alongside a U.S. report that the economy there shrank more than expected in the fourth quarter.

The next Canadian data will be the closely watched gross domestic product figures on Monday, which are expected to show the economy shrank in the fourth quarter of 2008.

That will be followed by the Bank of Canada’s interest rate announcement on March 3. A Reuters poll conducted on Thursday showed most primary securities dealers expect the bank to cut its key interest rate next week. [ID:nTOR004250]

The interest-rate sensitive two-year bond rose 11 Canadian cents to C$102.75 to yield 1.156 percent, while the 10-year bond rose 39 Canadian cent to C$105.61 to yield 3.105 percent.

The 30-year bond rallied 45 Canadian cents to C$122.95 to yield 3.685. (Editing by Tom Hals)

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