TORONTO: The Canadian dollar set a 12-year low against its US counterpart on Wednesday after risk aversion hit financial markets and crude oil prices tumbled, overshadowing an improvement in Canada's trade deficit.
Canada posted a smaller-than-expected trade deficit of C$1.99 billion in November from a revised C$2.49 billion gap in October on increased exports to the United States, data from Statistics Canada showed.
"It's a step in the right direction," said BMO Capital Markets senior economist Sal Guatieri.
North Korea's reported successful nuclear test and further weakening in China's yuan after data showed the nation's services Purchasing Managers' Index expanded at its slowest rate in 17 months weighed on sentiment.
Oil prices slid to set 11-year lows on Wednesday as the row between Saudi Arabia and Iran made any cooperation between major exporters to cut output even less likely.
US crude prices were down 3.89 percent at $34.57 a barrel, while Brent crude lost 4.89 percent to $34.64.
Meanwhile, stronger-than-expected US private employment data for December helped support the greenback.
At 9:19 a.m. EST (1419 GMT), the Canadian dollar was trading at C$1.4075 to the greenback, or 71.05 US cents, weaker than the Bank of Canada's official close of C$1.3989, or 71.48 US cents.
The currency's strongest level of the session was C$1.3973, while it hit its weakest level since August 2003 at C$1.4109.
The weaker Canadian dollar is the main reason behind improvement in Canada's trade balance, according to Guatieri, although continued growth in US demand also helped.
"The currency's impact on growth should improve through the year," Guatieri added.
Canadian government bond prices were higher across the maturity curve on the flight to safety, with the two-year price up 2.5 Canadian cents to yield 0.437 percent and the benchmark 10-year rising 33 Canadian cents to yield 1.339 percent.
The curve flattened, as the spread between the 2-year and 10-year yields narrowed by 2.4 basis points to 90.2 basis points, indicating outperformance for longer-dated maturities.
The Canada-US 10-year bond spread was 2.8 basis points narrower at -84.6 basis points as Treasuries outperformed.
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