TORONTO: The Canadian dollar recovered from a one-month low against the US currency on Wednesday after US crude oil topped $102 a barrel and global equities trimmed earlier losses.
The resource-driven currency's correlation with oil came back into play after recently giving way to dominating worries about the euro zone debt crisis.
However, market players cautioned that the correlation will not be meaningful again until the European story moves to the backburner.
"Oil has been a story of its own here with the run it's had over $100, and the correlation has broken down quite badly between the Canadian dollar and oil as of late," said Blake Jespersen, director of foreign exchange sales at BMO Capital Markets.
"You've seen crude rally almost 10 percent and the Canadian dollar really hasn't moved, in fact it's weakened off."
US crude prices soared on hopes of a quick solution to a year-long bottleneck that has weighed heavily on Midwest crude prices, as well as government reports that showed crude oil and distillate stocks fell, and better than expected industrial output data for October.
At 12:46 p.m. (1746 GMT), the currency was at C$1.0203 against the US dollar, or 98.01 US cents, up slightly from Tuesday's North American close at C$1.0208 against the greenback, or 97.96 US cents.
It was shaping up as a volatile day for the Canadian dollar, with it swinging from a low of C$1.0290 earlier in the session to a high of C$1.0194.
"The risk tone has improved slightly throughout the day but it hasn't really been enough to move the Canadian dollar through the C$1.02 level," said Jespersen.
"We're just seeing the buyers of CAD that we typically see on these moves have just not been playing much lately. There's a lot of paralysis in the market relating to European concerns."
He noted there was support for the Canadian currency around C$1.0350 and resistance back toward parity against the greenback.
The currency was already on better footing after the European Central Bank bought Italian and Spanish debt to help stem a renewed selloff of euro zone government bonds.
Policymakers warned on Wednesday that Europe's debt crisis posed dangers to the global economy as signs grew that the contagion was starting to spread to larger European nations.
The yield spread of 10-year French government bonds over their German equivalents widened to a euro-era high on fears the crisis was starting to move to economies that had been considered more isolated from the problems.
"There's still a lot of risk out there. As long as the issues in Europe are still very much prevalent, which they are, the bias is for the Canadian dollar to weaken further," said Mazen Issa, Canada macro strategist at TD Securities.
"There's really no clarity in terms of what will happen in Italy and which direction spreads will go."
Canadian government bond prices were little changed across the curve. The two-year bond was down 1 Canadian cent to yield 0.907 percent, while the 10-year bond eased 3 Canadian cents to yield 2.129 percent.
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