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Canada dollar ends up in technically driven trading

TORONTO: The Canadian dollar closed substantially higher on Friday, driven by strong, technical trading.

"It was more technically-driven than anything. There was no fundamental reason why. There is no one specific thing that points to this strength in the currency," said a trader at a major Canadian bank.

The Canadian dollar closed at C$1.4619 (68.06 US cents) on Friday, versus C$1.4702 (68.02 US cents) at the previous session's close.

The Canadian unit opened around C$1.4675 in North American trading and crept down to C$1.4685 and then came right back up, the trader said.

The markets were relieved earlier in the week when the US Federal Reserve did not make an aggressive interest rate hike, but opted for a 25 basis point increase, said Benjamin Tal, senior economist at Canadian Imperial Bank of Commerce.

That relief was reflected in the Canadian currency's stronger performance on Friday, he said.

"So the removal of the uncertainty of a more aggressive move by the Fed worked to an extent to improve the sentiments with regards to the Canadian dollar," he said.

"The name of the game is interest-rate differentials. As long as we remain below the US, the potential of the dollar to improve in any significant way is very limited," Tal added.

Dissension among Canada's governing Liberal Party continues to be closely watched by some market players. Some feel that Finance Minister Paul Martin will resign if Prime Minister Jean Chretien does not step aside and let him succeed.

"This was actually seen as a negative for the Canadian dollar and the market overreacted a little bit last week and early this week," said Tal.

"Now, people are putting things into perspective. There seems to be more unity in the Liberal Party and the risk of the finance minister resigning any time soon is not real. So the markets are correcting a little bit for it and realising there was a little bit of a overreaction," he added.

Analysts said oil settlement day, when domestic oil exporters turn their income received in US dollars into Canadian dollars, was not a factor in Canadian dollar trading on Friday.

Little Canadian economic news is expected next week, and the January GDP, to be released on Friday, will likely be the major focus. There is mixed speculation about how these figures will affect the Canadian dollar.

Tal said he expects the Canadian dollar to range between C$1.4706 to C$1.4493 over the longer term.

"I see the dollar trading sideways over the next few months. As long as the markets keep fearing that the Bank of Canada will not match the next move by the US Federal Reserve, this will be a negative for the dollar," Tal said.

In cross-trading against major currencies, the Canadian dollar was at 73.12 yen and at C$1.4275 against the euro. The Canadian dollar was at A$1.1237 against the Australian dollar.-Reuters