Published: Tue, 31 Mar 2009 15:05:33 +0200

Equity Rally Driving Canadian Dollar Gains against Greenback

(CEP News) - Canadian data is not providing any direction for the Canadian dollar, as a rally in equities is dominating currency moves.

A modest rise in global equity markets Tuesday morning is causing a broad selloff in the U.S. dollar, which is helping the loonie retrace some of its losses Monday morning.

USD/CAD could see further gains as support at 1.25 CAD appears to be holding. The cross is hovering in the mid-1.25 CAD area ahead of the North American open. Compared to other commodity currencies like the Australian and New Zealand dollars, the loonie is one of the major laggards this morning.

The Aussie dollar is up 1.7% on the day and the kiwi is up 1.6% on the day, while the loonie is up only 0.8% on the day.

Canadian data, which was relatively in line with the consensus forecast, is not having much impact on the loonie.

Canada's economy contracted 0.7% from January, Statistics Canada reported Tuesday. The drop was led by a decline in the output of manufacturing, particularly motor vehicle and associated parts industries, according to the report.

At the same time, the Industrial Product Price Index advanced 0.4% in February, while the raw materials price index jumped 1.7% over its January figure. On an annual basis, the IPPI was up 1.6% from 12 month ago. The RMPI was 30.7% lower than it was a year ago.

Although risk appetite is helping to boost the Canadian dollar, Matt Perrier, currency analyst from BMO Capital Markets, said he prefers to buy the U.S. dollar on the dips.

Sacha Tihanyi, currency strategist from Scotia Capital, said it will be difficult to determine short term direction in USD/CAD because of month-end and quarter-end flows.

"I think we are going to see some weird moves because of portfolio rebalancing, especially around 10 a.m." he said.

However, the medium-term outlook for the Canadian dollar is not as gloomy as it once was. Tihanyi said he is less bearish on the loonie than he first was, and that it looks as if markets have priced in most of the economic weakness for the Canadian economy.

"The data is going be ugly, but I think we are prepared for it," he said.

Euro/USD up 1.13 cents to 1.3313

USD/CAD down 0.72 cents to 1.2553

USD/Yen up 1.14 points to 98.39

GBP/USD up 0.32 cents to 1.4298

AUD/USD up 1.18 cents to 0.6933

Euro/Yen up 2.63 points to 130.99

Euro/GBP up 0.58 pence to 0.9310

GBP/CAD down 0.65 cents to 1.7944

CAD/Yen up 1.34 points to 78.40

Euro/CAD up 0.49 cents to 1.6711

The U.S. Dollar Index is down 0.70 points to 85.17

All data taken at 9:03 a.m. EDT.

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