By Frank Pingue
TORONTO, July 20 (Reuters) - The Canadian dollar fell hard versus the U.S. currency on Friday as its inability to find a comfort zone above a key level triggered a freefall that was magnified by thin markets.
Domestic bond prices took advantage of the absence of any Canadian data, which lately has painted a picture of a red-hot economy, and followed U.S. treasuries higher.
The Canadian dollar closed at C$1.0485 to the U.S. dollar, or 95.37 U.S. cents, down from C$1.0437 to the U.S. dollar, or 95.81 U.S. cents, at Thursday's close.
The sharp drop in the Canadian currency, which earlier this week reached a 30-year high of C$1.0400, or 96.15 U.S. cents, picked up steam around midday as traders cleaned out positions on a day that saw no major economic news.
Further losses could be in store for the currency, given that its ascent over the past three weeks has mostly been the result of a weaker U.S. dollar rather than stronger economic fundamentals.
"Until we we get some indication that there is a foundation for a break of 96 (U.S.) cents I think the currency is probably just going to do the whack-a-mole thing and just poke its head above 96 (U.S.) cents and get beaten back down," said David Watt, senior currency strategist at RBC Capital Markets.
Watt also said the lack of any Canadian data or other key events exaggerated the move by the currency, which fell to a session low of C$1.0498, or 95.26 U.S. cents, before recovering slightly and entering a tight range.
Unlike earlier in the week, the Canadian dollar was not able to draw any support from oil prices, even though they inched closer to a record high on supply concerns.
Its further moves are likely to be dictated by commodity prices and the U.S. dollar, given the relatively empty domestic economic calendar next week.
May retail sales figures, due on Tuesday, are the only key piece of domestic data due next week that will grab the market's attention.
Bond prices, which have been spiraling lower in recent months, followed U.S. treasuries higher as dealers opted for the security amid U.S. subprime loan and credit worries.
"There's a mild flight to quality on the back of instability in the subprime mortgage market as well as credit markets getting nervous over the glut of high-leveraged financing deals going on," said Chris Holmes, fixed income strategist at J.P. Morgan Canada.
"In those environments, Canada will typically underperform the move in the U.S. but still follow the direction of yield changes."
The two-year bond gained 8 Canadian cents to C$98.48 to yield 4.612 percent, while the 10-year bond increased 35 Canadian cents to C$95.95 to yield 4.560 percent.
The yield spread between the two-year and 10-year bond moved to -5.5 basis points from -4.7 basis points at the previous close.
The 30-year bond was at C$108.75 to yield 4.466 percent. In the United States, the 30-year treasury yielded 5.060 percent.
The three-month when-issued T-bill yielded 4.53 percent, unchanged from the previous close.