Published: Tue, 17 Feb 2009 13:41:02 +0100

Canadian Dollar Falls Sharply as Risk Rises Overnight

(CEP News) - The Canadian dollar is trading near a one-month low against the U.S. dollar, which is up against most majors Tuesday as concerns about the global economy continue to grow.

Overnight, the pair broke through 1.2500, which has been a strong psychological barrier, but so far gains have been capped at a session high of 1.2654 CAD. USD/CAD remains near session highs, trading up more than 2 cents to 1.2638 CAD. The Canadian dollar has been the worst performer among the G10 currencies overnight.

The Canadian dollar isn't alone as the greenback continues to make broad gains as a result of renewed safe haven plays. The U.S. dollar is the best performing currency among the G10 currencies.

According to some currency strategists, the rise in risk aversion is mostly due to a report released from Moody's warning that Western European Banks face downgrades due to significant exposure to financial problems in Eastern Europe.

The news, coupled with a gloomy outlook for the Canadian economy, is helping drag down the loonie.

Ashraf Laidi, market strategist from CMC Markets, said Monday's weaker-than-expected Canadian manufacturing and international transactions reports could be hurting the loonie this morning.

On Monday, foreign investors reduced their holdings of Canadian securities by nearly twice the amount economists had expected, Statistics Canada reported. International investors removed $2.835 billion in Canadian securities from their portfolios in the month, compared to expectations for a decline of $1.4 billion.

Meanwhile, Canadian manufacturing shipments posted its sharpest decline since 1992 in December, falling 8.0% against the 5.3% drop expected, Statistics Canada reported.

Laidi added that he's expecting gains to be contained to the 1.2650 CAD area. "1.2690 is only seen possible in case of further deterioration in equities," he said.

Adam Cole, head of currency strategy at RBC Capital Markets, said he will be watching equity markets closely to determine further weakness or strength in the loonie.

Cole said he expects the Canadian dollar to weaken further as growth continues to deteriorate in line with the global economy.

Cole is looking for USD/CAD to continue to move higher and eventually test the 1.30 CAD level.

Euro/USD down 1.86 cents to 1.2617

USD/CAD up 2.14 cents to 1.2640

USD/Yen up 0.16 points to 91.90

GBP/USD down 0.51 cents to 1.4248

AUD/USD down 1.09 cents to 0.6395

Euro/Yen down 1.51 points to 115.94

Euro/GBP down 1.00 pence to 0.8856

GBP/CAD up 2.39 cents to 1.8006

CAD/Yen down 1.12 points to 72.71

The U.S. Dollar Index is up 0.73 points to 87.39

All data taken at 7:34 a.m. EST

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