By Frank Pingue
TORONTO, July 26 (Reuters) - The Canadian dollar fell to
its lowest level in two weeks against the U.S. currency on
Thursday as nervous markets abandoned the commodity-sensitive
currency in favor of less risk, knocking it down more than 1
Bond prices, with no key Canadian data to alter the
market's mood, took advantage of another sharp selloff in
equity markets to storm higher.
The Canadian dollar closed at C$1.0536 to the U.S. dollar,
or 94.91 U.S. cents, down from C$1.0407 to the U.S. dollar, or
96.09 U.S. cents, at Wednesday's session close.
It marked a sharp turnaround from earlier in the week when
the Canadian currency rallied around solid domestic retail
sales and rocketed to a multi-decade high comfortably above 96
"This was a watershed day for financial markets ... clearly
there has been a significant change in sentiment in global
financial markets," said Doug Porter, deputy chief economist at
BMO Capital Markets.
"And one of the places it played out was in the currency
markets where we saw a massive appreciation in the yen and a
lot of bets in so-called risky currencies get pulled off the
table, and the Canadian dollar was one of the victims of that
The reversal of "carry" trades, which previously pushed the
yen lower in favor of high-yielding currencies, was triggered
by investors who grew increasingly worried by problems in
credit markets. That resulted in a flight from risky assets
that were financed by borrowing in the low-yielding Japanese
A drop in commodity prices, which fell on concerns about
the U.S. economy, also weighed on the Canadian dollar.
BONDS TAKE OFF
Canadian bond prices, which have been reeling in recent
months at the hands of robust domestic data, relished their
role as a safe-haven as investors fled from riskier assets.
"To a large extent, Canada just followed in the slipstream
of the massive rally in treasuries," said Porter.
Bond dealers will now turn their focus to U.S. real GDP
report due on Friday and, to a lesser extent, the Business
Conditions Survey of manufacturing industries from Statistics
Canada, also due on Friday.
The two-year bond rose 14 Canadian cents to C$98.49 to
yield 4.614 percent, while the 10-year bond added 35 Canadian
cents to C$96.22 to yield 4.523 percent.
The yield spread between the two-year and 10-year bond was
at -9.1 basis points, from -13.4 at the previous close.
The 30-year bond increased 62 Canadian cents to C$109.70 to
yield 4.412 percent. In the United States, the 30-year treasury
yielded 4.955 percent.
The three-month when-issued T-bill yielded 4.60 percent,
down from 4.61 percent at the previous close.