BUSINESS

Canadian dollar below parity, traders avoid risk amid Greek election turmoil

05/09/2012 08:52 EDT | Updated 07/09/2012 05:12 EDT
TORONTO - The Canadian dollar closed below parity with the U.S. currency for the first time in just over two months Wednesday as turmoil in Greece persuaded traders to avoid riskier assets like the loonie and opt for the perceived safety of U.S. Treasuries.

Falling commodity prices also helped push the loonie down 0.26 of a cent to 99.91 cents US, its first close below 100 cents US since Mar.6.

"Risk aversion is the name of the game," said Mark Chandler, head of Canadian FIC Strategy at RBC Dominion Securities.

"The risk sell-off has undermined equities, undermined commodities and pulled the Canadian dollar along for the ride as well."

Greece has weighed on markets since inconclusive elections Sunday failed to produce a party that could form a government and raised worries that the country will end up leaving the euro common currency.

After the conservative New Democracy failed to muster enough support to form a government, the mandate has passed onto Syriza, a left-wing party that came a surprise second in the election.

Its leader, Alexis Tsipras, said Tuesday that Greece was no longer bound by its promises to cut spending sharply. But a failure to keep those promises could see international lenders cut off rescue funding, which would likely lead Greece to default.

Tsipras is not expected to be able to form a government and most observers think a second election will be called for June.

"If a new election is called, the probability of a (eurozone) exit rises substantially," observed Chandler.

Analysts warn that Greece could run out of money as soon as next month without a government to negotiate the next level of its bailout.

Commodity prices continued to back off amid the European turmoil and signs of a slowing global economy.

The June crude contract on the New York Mercantile Exchange declined 20 cents to US$96.81 a barrel.

Prices are down from US$106 last week and were particularly pressured Wednesday by a report that showed U.S. demand remains weak. The U.S. government said U.S. oil supplies grew by 3.7 million barrels, raising the nation’s supply to the highest level since 1990. Oil and gasoline demand also fell last week, when compared with the same time last year.

Metal prices also fell, with the July copper contract in New York down two cents to US$3.66 a pound. Copper, viewed as an economic bellwether because it is used in so many industries, has fallen almost six per cent this month.

Bullion prices also retreated with the June contract down $10.30 to US$1,594.20 an ounce.

Market nervousness spread to Spain on Wednesday, with government borrowing rates rising again.

The yield on benchmark Spanish 10-year bonds rose to 6.02 per cent by late afternoon, a jump of 0.24 percentage points on the day and uncomfortably high. Bond yields indicate the rate the government borrows at when it taps financial markets.