Loonie rises amid advancing oil prices, higher borrowing costs for Spain, Italy

TORONTO – The Canadian dollar closed higher Thursday amid rising commodity prices and higher borrowing costs for Spain and Italy.

The loonie rose 0.52 of a cent to 97.68 cents US.

Traders also took in a warning from the Bank of Canada that the high level of household debt and overvalued real estate in this country have left the economy vulnerable if a financial shock erupts in Europe.

The central bank’s latest financial system review says Canadian households generally have too much of their net worth tied to real estate, which it says is overvalued.

Spain’s 10-year borrowing rate inched up to 6.96 per cent in intraday trading from 6.67 per cent. That is close to the seven per cent rate considered unsustainable and which led Greece, Portugal and Ireland to seek financial rescue packages.

“At these levels, market financing has essentially evaporated for Spain, leaving the country notably vulnerable,” observed Scotia Capital chief currency strategist Camilla Sutton.

The latest rise came after ratings agency Moody’s downgraded Spain’s government debt three notches late Wednesday, placing it one level above junk status.

The move came after eurozone finance ministers offered Spain up to €100 billion to bail out its banks, which are loaded with massive amounts of bad loans from a collapsed real estate sector. Moody’s said the loan will add considerably to the government’s debt burden.

The debt crisis contagion continued to spread to Italy. Its 10-year borrowing rate rose to 6.07 per cent from 6.02 per cent and the interest rate on its one-year bonds also rose sharply.

And in a bond auction, Italy paid a 5.3 per cent interest rate, up from 3.91 per cent last month, to sell €3 billion in three-year paper. The sale was fully subscribed.

Oil prices headed higher after OPEC oil ministers decided to keep a production target of 30 million barrels a day, citing mounting world economic concerns for their decision.

The July crude contract on the New York Mercantile Exchange was up $1.29 at US$83.91 a barrel.

July copper was ahead two cents at US$3.35 a pound while August gold edged up 20 cents to US$1,619.60 an ounce.

There was also caution ahead of Greek elections on Sunday. Greeks will determine whether the country sticks to its highly unpopular austerity program of tax hikes and spending cuts that were agreed upon in order to receive billions of euros in bailouts that are keeping the country afloat.

If political parties are elected that favour reneging on the program, the country’s international bailout and its membership in the euro currency union would be at risk.