Canada dollar takes biggest one-day dive in 36 yrs

By John McCrank

TORONTO, Nov 12 (Reuters) - The Canadian dollar plunged
almost 3 percent against the U.S. dollar on Monday, its biggest
one-day fall since January 1971, as risk aversion and the
unwinding of carry trades knocked the currency well down from
its recent modern-day high.

The Canadian dollar unofficially closed at US$1.0307,
valuing each U.S. dollar at 97.02 Canadian cents, down 2.9
percent from Friday's close of US$1.0606, or 94.28 Canadian
cents. It was was fourth straight session that the Canadian
unit dropped versus the greenback.

North American bond markets were closed on Monday for
Veterans' Day in the United States and the Remembrance Day
holiday in Canada. This meant thinner trading, which amplified
the currency's moves, analysts said.

"It's been difficult to get your head around what's going
on when you've seen the Canadian dollar rally so much in the
past four or five months," said David Bradley, director of
foreign exchange trading at Scotia Capital. "To see this
reversal is quite something."

The Canadian currency has plunged more than 7 U.S. cents,
or 6.6 percent, since Wednesday, when it touched US$1.1039, its
highest level against the greenback since the 1870s.

Since Wednesday, risk aversion been the main theme in the
financial markets, after several large U S. financial
institutions announced big subprime mortgage-related
writedowns. Some investors fear this may be just the tip of the
iceberg.

The market jitters are causing investors to unwind risky
carry trades, said Gareth Sylvester, senior currency strategist
at HIFX Plc, in San Francisco.

In carry trades, investors borrow low-yielding currencies,
such as the Japanese yen, to fund the purchase of
higher-yielding currencies such as the Australian or New
Zealand dollars.

While Canada's dollar is not a high-yielder, with the Bank
of Canada's key overnight rate at 4.50 percent, the currency
often gets lumped in with carry-trade currencies, which like
the Canadian dollar are often commodity-driven.

Investors tend to unwind carry trades in times of risk, as
market volatility or a rally in the yen can easily wipe out
carry-trade profits.

"We've seen significant amounts of yen strength and I think
that just points to traders sort of squaring-up their carry
trade positions," Sylvester said.

On Monday, the yen climbed to its highest point against the
greenback in 1-1/2 years, while the Australian and New Zealand
dollars were down sharply, in line with the Canadian dollar.

PROFIT TAKING

The credit-related concerns along with the Canadian
dollar's rapid ascent to modern-day highs have also created an
environment ripe for profit-taking, said Scotia's Bradley.

"I wouldn't be surprised by the end of this week if you see
quite a reversal in the speculative positions on the
(International Monetary Market)."

Comments last week by Canadian Prime Minister Stephen
Harper, Finance Minister Jim Flaherty and various U.S.
investment firms saying the Canadian dollar is overvalued have
added downward pressure to the currency, Bradley said.

Also, oil and gold prices were off their recent highs,
making the Canadian dollar less attractive to investors, as
Canada is a major commodities producer and exporter, said
Matthew Strauss, senior currency strategist at RBC Capital
Markets.

But he said that commodities prices were a secondary story,
and that risk aversion was the main cause of the Canadian
dollar's fall.

(Reporting by John McCrank; Editing by Peter Galloway)