Published: Fri, 06 Mar 2009 16:49:51 +0100

Canadian Dollar Loses Ground as Equities Fall

(CEP News) - The Canadian dollar saw some brief strength overnight, but a drop in equity markets is dragging the loonie lower.

Broader U.S. dollar weakness helped the Canadian dollar make modest gains overnight.USD/CAD then spiked lower in what currency strategists said was a relief rally following an in line U.S. nonfarm payrolls report. The cross hit a session low at 1.2766 CAD following the report.

However, strategists are not expecting the relief rally to last. U.S. equity markets already are well down from their highs and the U.S. dollar is making broad gains in currency markets. USD/CAD is trading close to the 1.2900 level.

The U.S. economy shed 651,000 jobs in February, the fourth month in a row that job losses have been more than half-a-million. The unemployment rate rose five-tenths to 8.1%, the highest rate since December 1983. Forecasts had been much higher, with some economists saying the data could show a drop of one million jobs.

Matthew Strauss, senior currency strategist from RBC Capital Markets, said markets were expecting a very grim employment report and that positive sentiment rose after the in line figure.

However, he said the numbers are nothing to get excited about. Once the market fully digests the data, the U.S. dollar will move higher and risk aversion will return to the market, he said.

Strauss said that even though he is looking for USD/CAD to move higher, gains could be limited going into the weekend. "I don't think there are enough reasons right now to push the cross much above 1.29 [CAD]," he said.

Sacha Tihanyi, currency strategist from Scotia Capital, said that although the outlook for the Canadian economy isn't great, he expects it to close the week around the 1.28 CAD level. He said there just doesn't seem to be enough bad data to boost the cross through 1.30.

"I think weakness for the Canadian dollar is still on the books," he said. "But we are going to need some help to get past 1.30 [CAD]."

"I think if equities are weaker and we get a bad Canadian employment number next Friday, we could move through 1.30 [CAD]," he added. "But a lot can happen between now and next Friday."

Euro/USD up 1.38 cents to 1.2678

USD/CAD down 0.43 cents to 1.2869

USD/Yen down 0.47 points to 97.61

GBP/USD up 0.51 cents to 1.4169

AUD/USD up 0.19 cents to 0.6403

Euro/Yen up 0.74 points to 123.73

Euro/GBP up 0.66 pence to 0.8948

GBP/CAD up 0.14 cents to 1.8240

CAD/Yen down 0.13 points to 75.85

Euro/CAD up 1.27 cents to 1.6314

The U.S. Dollar Index is down 0.83 points to 88.28

All data taken at 10:48 a.m. EST.

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca