Loonie Drops on Speculation of Worsening Turmoil in Europe

By TraderVox.com

Tradervox (Dublin) – The Canadian dollar has weakened to its lowest last seen in January after the European central bank indicated that it is going to reduce its lending to some banks in Greece to reduce its risk. Investors have taken this to mean that Greece might lose its position in euro zone which has caused risk aversion.

Earlier, the loonie had erased some of the losses it had experienced against the dollar after economic data showed positive economic outlook for North American region lending support to sentiments that Bank of Canada might increase interest rates. However, the crisis in Europe has led to a decline in crude oil prices which is the biggest export commodity from Canada hence forcing the nation’s currency to drop.

According to Lutz Karpowitz who is a senior Currency Strategist at Commerzbank in Frankfurt said that the current trend has been caused by the market’s inability to predict what will happen next in Europe. He also added that the lack of credibility in Greek banks has caused the Canadian dollar to decrease as it is a currency driven by risk. He, however, indicated that despite the current pressure, loonie’s downward trend is limited and it might recover in the coming weeks.

Technical data has shown that the Canadian dollar implied volatility for one month against the US dollar has increased to 9.35 percent which is the highest since January. It had earlier in April fallen to as low as 6.59 percent, its lowest level since June 2007. The 5-year average is at 12 percent giving some confidence to traders. Implied volatility data is used by trades to quote and set prices and it indicates the expected pace of currency swings.

The Canadian currency declined by 0.5 perccent against the US dollar to trade at C$1.0122. it had earlier touched its lowest level since January 25 of C$1.0133 per US dollar.

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