TORONTO: The Canadian dollar won some respite from its recent decline against its US counterpart on Thursday, a day after it sank to an almost 12-month low, as the market brushed off weak Chinese economic data and the possibility of a reduction in US stimulus.
While major North American equity markets closed lower, most of them finished the day off their session lows as investors saw the early fall from record highs as an opportunity to buy.
The Japanese yen rallied sharply against the US dollar and the euro after a shock drop in Chinese factory data hurt Asian and European stock markets, and the Canadian currency went along for the ride.
"The main story today was the ability of equity markets to get back some of their losses, and that would be consistent with the improvement we saw in some of the riskier currencies, Canada included," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
The Swiss franc, seen as a safe bet in uncertain times, rose as well.
The gains, which brought the Canadian currency back below C$1.03 to the greenback after nearing C$1.04 on Wednesday, could be overshadowed on Friday and early next week as the market looks ahead to a Bank of Canada policy announcement the middle of next week and first-quarter gross domestic product figures next Friday.
"The extent of any gains in the Canadian dollar are going to be somewhat limited, at least until we get over the hump of the (Bank of Canada) meeting," Chandler said.
The loonie, as the Canadian currency is colloquially known, had fallen almost four cents since it neared parity with the greenback in early May.
It ended on Thursday at C$1.0294, or 97.14 US cents, after ending Wednesday's North American session at C$1.0372 to the greenback, or 96.41 US cents.
The loonie gained marginally against the Australian dollar , another commodity currency, but one that is more closely tied to the fortunes of China due to its geographical proximity.
A preliminary survey of manufacturing in May in China, the world's second largest economy, showed it shrank for the first time in seven months.
European factory sentiment dropped, suggesting that the euro zone's economy was likely to contract again in the second quarter.
Meanwhile, comments on Wednesday by US Federal Reserve chairman Ben Bernanke that Fed stimulus measures could be scaled back also added to investor caution worldwide.
"The Canadian dollar is caught in a nasty move in global markets," said Adam Button, currency analyst at ForexLive in Montreal.
He said correlations between asset classes had broken down and investors were struggling to guess where markets go from here.
"It's walking on a razor's edge right now. It's 24 hours of fright, after three months of exuberance," Button said. "It could prove to be a turning point, or a blip. At this point, I lean more toward a turning point, and continued Canadian dollar weakness."
Prices for Canadian government debt were mixed, with the two-year bond down less than a cent to yield 1.036 percent, while the benchmark 10-year bond added 5 Canadian cents to yield 1.964 percent.
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