C$ slips on Europe worries, rate views

TORONTO: Canada's dollar weakened against the US dollar on Tuesday as fears over European debt mounted amid a new round of warnings and the market continued to scale back expectations on Canadian interest-rate hikes.

The commodity currency shrugged off rising prices for oil and gold, as concerns about a spreading EU crisis fueled safe-haven buying.

Europe's policy options to avert a Greek default are narrowing fast after the ECB and ratings agencies warned against even voluntary debt rescheduling and Athens highlighted its urgent need for more EU cash.

That followed concerns on Monday that a Greek debt default could drag a new group of countries -- including Group of Eight member Italy -- into trouble.

Meanwhile, market participants have gradually revised their Bank of Canada interest-rate expectations further into the year on renewed global growth concerns and patchy domestic data.

"I think the currency is being weighed on by that old faithful factor of concerns over Europe and more generally, there is this broadening view that the Bank of Canada is likely to lay low for longer than the market previously thought," said Douglas Porter, deputy chief economist at BMO Capital Markets.

With no Canadian data due this week, market players will have little else to help shape interest-rate expectations ahead of the Bank of Canada's May 31 policy decision.

The Canadian dollar ended the North American session at C$0.9761 to the US dollar, or $1.0245, down from C$0.9730 to the US dollar, or $1.0277, at Friday's close.

Canadian financial markets were shut on Monday for Victoria Day. The currency on Monday had traded as low as C$0.9810 to the US dollar, or $1.0194, its lowest in eight weeks, Reuters data showed.

RBC Capital Markets on Tuesday became the third primary dealer in the past week to push back its rate-hike forecast from July to September, citing the Bank of Canada's recent concern about developments abroad for the forecast change.

Mark Chandler, RBC's head of fixed income and currency, said the decision was mostly prompted by the central bank expressing more concern about developments abroad and financial market volatility, as well as the anticipated end of the US Federal Reserve's quantitative easing program, and what that might mean for the distribution of risks around mid-year.

"We appreciate the message that they've been sending," he said.

As North American equities sold off, Canadian bond prices picked up across the curve, and outperformed their US counterparts as the domestic market played catch-up following the long weekend.

Canada's two-year bond rose 2 Canadian cents to yield 1.589 percent. The 10-year bond jumped 35 Canadian cents to yield 3.107 percent.

Almost no one expects the central bank to hike rates at its next policy setting on May 31.

Copyright Reuters, 2011