The Canadian dollar fell to its weakest level against the greenback in more than three weeks on Tuesday, hit by a surprise economic contraction at home at the start of the second quarter as investors watched Greece approach default on its debt. Canadian economic growth unexpectedly edged down 0.1 percent in April, hurt by a decline in activity in mining and oil and gas extraction, data from Statistics Canada showed.
The monthly decline boded poorly for an anticipated pick-up in growth in the second quarter and the loonie fell as traders calculated the Bank of Canada's likely policy reaction. "The numbers mitigate or argue against the (Bank of Canada Governor Stephen) Poloz line that he's been highlighting over recent months regarding the downturn being essentially front-loaded or certainly likely to be contained by the end of Q1," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London.
The Canadian dollar extended declines later in the session as the deadline for Greece to repay a loan to the International Monetary Fund crept closer. Talks between lenders and Greece broke down over the weekend and a default could set Greece on the path of leaving the euro zone. The Canadian dollar ended the North American session at C$1.2490 to the greenback, or 80.06 US cents, weaker than Monday's close of C$1.2392, or 80.70 US cents. The loonie touched a session low of C$1.2500, its weakest level since June 5.
Month-end volatility and investor positioning ahead of holidays in both Canada and the United States later in the week were also adding to the Canadian dollar's moves, said Madhavji. While the loonie is likely to oscillate around C$1.25, it could fall to C$1.27 in the coming weeks if the Greek crisis deepens, he said. Canadian government bond prices were higher across the maturity curve, with the two-year price up 16.5 Canadian cents to yield 0.483 percent and the benchmark 10-year rising 57 Canadian cents to yield 1.683 percent.
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