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Canada dollar ends down, but rebounds from lows

TORONTO: The Canadian dollar ended significantly lower on Friday after stronger-than-expected US economic data kindled fears that the US Federal Reserve may raise interest rates more sharply than expected.

Lower commodity prices, general weakness in commodity-linked currencies, and the resilient US dollar were also cited as sources of weakness for the Canadian dollar.

While the currency tilted sharply lower midway through the session after a spate of weakness afflicted commodity-linked currencies, it was able to recover somewhat on corporate interest in selling US dollars, market watchers said.

The Canadian dollar closed at C$1.4455 (69.18 US cents) on Friday after closing at C$1.4353 (69.67 US cents) the previous session.

The US employment cost index rose 1.1 percent in the fourth quarter, surpassing the expected 0.9 percent increase. Gross domestic product rose 5.8 percent in the same quarter on an annualized basis. Economists had expected a 5.3 percent GDP growth rate.

That inspired a wave of volatility that swept over currency, bond and equity markets on Friday and quickly swamped the formerly buoyant Canadian dollar.

"We had a volatile day all around in the bond market and the currency market," said Rick Egelton, deputy chief economist at Bank of Montreal.

Fears that the Fed may raise interest rates by 50 basis points at its policy-setting open markets committee meeting rather than 25 basis points were a primary factor in the market turbulence on Friday, he said.

"I think people are starting to raise the magnitude of the interest rate hikes they're foreseeing," Egelton said.

The downturn in the Canadian unit also reflected a pullback from earlier strength, he added. "I think today there's been some consolidation of recent gains, some weakness in commodity prices and the flow into the US market," Egelton said. "I thought the weakness in the Canadian dollar today as a bit surprising and maybe a bit overdone considering where the fundamentals are," he said.

The Canadian currency was weakening off early in the session even before the US data was released, as US players were active in London buying US dollars against its Canadian counterpart, said one currency trader.

"A lot of rumours were going around as to the cause behind it, ranging from hedge funds being in trouble to (buying interest) from European fund managers," he said.

"The net effect was that it definitely caught the market off guard. I think a lot Canadian banks had (US) dollars to go from their corporates at the high C$1.4300s, but it wasn't enough to put a cap on things."

The Canadian dollar started to skid sharply lower when the Australian dollar broke lower late in morning trading and the US dollar strengthened against a variety of currencies, market watchers said.

"We accelerated again to (downside) when Aussie broke through the 64.10 level," the trader said "I think people were given the excuse to sell Canada when they saw that currency really being punished."

But Canadian banks had corporate players who wanted to sell US dollars, and when the Canadian dollar hit the C$1.4500 level, more corporates entered the market to buy Canadian dollars and sell their US equivalents, the trade said.

In the coming days, market players will be wary of the Canadian unit, he added. "I think you're going to see people a bit more hesitant to hold Canada dollar positions ahead of the (federal open market committee meeting)," he said, calling for the Canadian dollar to range between C$1.4350 to C$1.4500.

"That's probably going to be the case until the FOMC is over and done with, and then people will probably feel more confident putting on long Canada positions," he said.

In cross-trading against major currencies, the Canadian dollar was at 73.99 yen CADX and at C$1.4085 against the euro EURX. The Canadian dollar was at A$1.0919 against the Australian dollar CADX.-Reuetrs