TORONTO: The Canadian dollar weakened on Monday as safe-haven buying of the greenback increased after Russian President Vladimir Putin's forces tightened their grip on Ukraine's Crimea region.
Data that showed manufacturing activity in China contracted in February, falling for the third month in a row, added to the pressure on the Canadian currency. The loonie is sensitive to economic developments in China, the world's second-largest economy and a major consumer of resources.
The military escalation in Crimea pummeled Russian stocks, bonds and the ruble on Monday.
But Gareth Sylvester, a director at Klarity FX in San Francisco, said that while a war in Europe would obviously have a massive impact on the global economy, currency markets are not yet pricing in a high probability of that happening.
"In terms of currency market reaction, I think overall it has been fairly muted," he said.
Sylvester said it was too early to assess the potential impact of any further escalation of the Ukraine conflict on regional natural gas exports or to gauge any macroeconomic consequences that would create more risk for the loonie.
The Canadian dollar pared some of its decline on Monday after figures showed Canadian manufacturers' prices climbed much more than expected in January, largely due to a weaker Canadian dollar. But the currency was unable to overcome market concern about the situation in Ukraine.
"We're seeing risk-averse sentiment really dominate price action this morning," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.
"Investors are really looking toward those safe-haven asset classes and safety is garnering a premium...which is in turn dragging the loonie lower."
The Canadian dollar ended the day at C$1.1084 to the greenback, or 90.22 US cents, weaker than Friday's close of C$1.1074, or 90.30 US cents.
Investors were also turning their attention to the Bank of Canada's policy announcement later in the week. With the central bank expected to hold interest rates at 1 percent, investors will be parsing its statement for any change in language.
Klarity FX's Sylvester said he sees dollar/Canada trading between C$1.1030 and C$1.1150 after the bank's statement with the market expecting the central bank might pull back from a recent dovish tilt.
Bank of Canada Governor Stephen Poloz recently said that two months of stronger inflation in Canada have made the central bank feel a "little more comfortable".
"With the CPI data coming in a little better than analysts were expecting, it's given Poloz and the Bank of Canada a little more reason to be comfortable in terms of the inflation picture," Cambridge Mercantile's Smith said.
"I don't really think they'll be changing either any language in the statement or their outlook for inflation going forward," Smith said.
Canadian government bond prices were higher across the maturity curve, with the two-year up half a Canadian cents to yield 0.998 percent and the benchmark 10-year up 25 Canadian cents to yield 2.401 percent.
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