The Canadian dollar hit a four-month low against its US counterpart on Friday and fell for a fifth straight session, as surprisingly high domestic inflation data failed to shift investor focus away from Europe's deepening debt crisis. The currency's move lower tracked broader risk aversion as overseas stocks erased this year's gains a day after Moody's cut its rating on Spanish banks en masse, heightening fears of contagion from the Greek political crisis.
"The lack of sustained response to the stronger-than-expected inflation speaks to a universal focus on all things euro zone," said David Tulk, chief Canada macro strategist at TD Securities. Weakness in the Canadian dollar mirrored the performance of US equities, which also lost ground as Facebook Inc made a modest market debut. Looking ahead, investors will pay attention to an emergency meeting of G8 leaders on the weekend, before a Canadian market holiday on Monday.
"We'll see if there are any headlines over the weekend but we don't have a tremendous amount of optimism for any cathartic rally," added Tulk. The Canadian dollar ended at C$1.0208 versus the US dollar, or 97.96 US cents, down from Thursday's North American session close at C$1.0191 versus the US dollar, or 98.13 US cents. For the week, the currency shed around 1.8 percent.
Overnight, the currency dropped as low as C$1.0227, or 97.78 US cents, its weakest since January 16. Jeremy Stretch, head of currency strategy at CIBC in London, saw the next near-term support level for the Canadian currency around C$1.0280. Canada's dollar underperformed against most major currencies, though it made gains against commodity-linked peers like the New Zealand and Australian dollars and Brazil real.
Earlier in the session, the Canadian dollar had benefited from domestic data which showed that on an annual basis, the overall inflation rate rose to 2.0 percent in April from 1.9 percent in March. The core rate, which excludes volatile items and is closely watched by the Bank of Canada, climbed to 2.1 percent from 1.9 percent. The report provided the Bank of Canada with more reason, if the European crisis doesn't undermine the economy, to launch the interest-rate hike it has hinted at recently.
The Bank of Canada surprised the market in April with a more bullish economic forecast and signalled it was starting to think more seriously about tightening monetary policy. But the latest leg of the European crisis dampened expectations of a move. Following the release, traders raised bets on an interest rate increase by the Bank of Canada later this year. They soon reversed them as the global market situation worsened.
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