Loonie breaks six-day losing run amid Italian political uncertainty

TORONTO – The Canadian dollar was higher Tuesday even as traders flocked to safe havens following the inconclusive result of the Italian elections Sunday and Monday.

The loonie was up 0.14 of a cent to 97.45 cents US following six, straight days of losses.

Traders avoided risk after Italy’s national elections showed no clear winner and raised the possibility of a hung parliament. The worry is that the country will lack the political will to pass the tough reforms it needs to snuff out its economic crisis and prevent a new round of global financial turmoil.

The centre-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament while the Senate looks split with no party in control.

“With a worst case scenario having been delivered from the Italian election results . . . the outlook for Italy has weakened,” said Scotia Capital chief currency strategist Camilla Sutton.

“In Italy, legislation is not passable without support from both the Upper and Lower Houses, accordingly uncertainty from Italian political developments are spurring fears of renewed uncertainty.”

Heightened political uncertainty drove Italian 10-year bond yields to a three-month high of 4.76 per cent.

Commodities were mixed with gold prices higher but oil and metals fell.

The April crude contract on the New York Mercantile Exchange lost 94 cents to US$92.17 a barrel.

March copper gave back one cent to US$3.53 a pound but traders looking for safety pushed the April bullion contract $10.10 higher to US$1,596.70 an ounce.

The loonie has fallen by about 2.5 US cents during February amid worries about the strength of the housing sector and the price differential between benchmark Brent crude and Western Canadian Select from the oilsands.

Traders are also concerned about U.S. economic strength, particularly as a Mar. 1 deadline looms when more than US$85 billion in across the board spending cuts will be triggered.

Also, the U.S. dollar gained strength last week amid concerns the U.S. Federal Reserve may abandon its easy monetary policy sooner than many analysts have been predicting.

Fed chairman Ben Bernanke is expected to be questioned on this when he appears before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

Finally, the loonie was hit at the end of last week as lower than expected retail sales for December pointed to a weakening economy while tame inflation figures indicated the Bank of Canada won’t be raising rates any time soon.

Traders looked ahead to Friday when Statistics Canada is expected to report that Canadian gross domestic product grew by 0.7 per cent in the fourth quarter. But it looks like growth started to flatten at the end of the year as the economy likely contracted by 0.1 per cent in December after rising 0.3 per cent in November.