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Canada Afternoon: C$ Ends Sharply Lower In Thin Trading

TORONTO (Dow Jones)--The Canadian dollar ended sharply lower Friday after earlier selling of the U.S. dollar prompted a short squeeze that sent the greenback scurrying higher against its Canadian counterpart in thin trading conditions.

Weak domestic manufacturing data for December were also a negative for the Canadian unit Friday.

The U.S. dollar was trading at C$1.0086 at 3:39 p.m. EST (2039 GMT), from C$0.9989 at 8:00 a.m. EST (1300 GMT) and C$0.9994 late Thursday.

It slipped to a low of C$0.9924 in overnight trading but had rebounded to the C$0.9970 area when Statistics Canada reported that manufacturing shipments were down 3.4% to C$48.63 billion (US$48.62 billion) after rising 1% the previous month, revised down from the preliminary 1.1% gain.

The market had expected a 0.1% loss.

Sales in constant dollars fell 5.8% to C$46.7 billion, the lowest level since August 2003. Overall 16 of the 21 manufacturing industries posted lower sales, accounting for nearly two-thirds of the total.

The U.S. dollar rallied back to the C$0.9995 area after the data, but then relinquished much of its gains to stabilize around C$0.9985.

However, in early afternoon trading it began a scramble higher that eventually took it to a sessional peak of C$1.0112 before it retreated somewhat.

Analysts said a short squeeze in the U.S. dollar in thin trading conditions was the main factor underlying Friday's turbulent trading.

"Basically, the market got squeezed a little bit. We tried to take out important support around C$0.9923 overnight and basically failed there," said George Davis, chief technical analyst for foreign exchange with RBC Capital Markets.

Around mid day, equity markets weakened and a U.S. dollar break above C$1.0024, that prompted an acceleration to the topside, he said.

"To be honest, I don't think there was much behind it. I think it was a little bit of stop loss buying and short covering, but liquidity was very, very thin," Davis said.

"At that point, I think most people were shutting down for the weekend here and south of the border," he said.

    USD Rally Called A Little Bit Suspect

Foreign exchange trading in Canada will be sharply curtailed Monday for the newly instituted Family Day holiday in Ontario, while U.S. markets will be closed for Presidents Day. "It feels like the market was caught short (U.S.) dollars, today," said Steve Butler, director of foreign exchange at Scotia Capital.

He also said light, pre-holiday trading conditions contributed to the rapid move higher by the greenback.

Whether or not the U.S. dollar will be able to extend its gains when full trading reopens Tuesday isn't clear, but analysts said it's a distinct possibility.

"I don't know if I'd bet the farm that we're going to see a continuation, but it does feel like maybe we're headed back to C$1.0200, now," Butler said. "Just given the way things have gone today, I think the risk is as we move into early next week we'll see prices continue to rally and test the topside levels," Davis said.

"On the one hand, you can say this rally is a little bit suspect, given that it happened in almost-holiday markets and thin liquidity," he said.

But the move above C$1.0024 is significant and likely presages a move towards C$1.0119, a resistance point the U.S. dollar failed to break above last week, Davis said.

"If we get above there, we start looking at the C$1.0250 area," he added.

In other Canadian data, monthly new motor vehicle sales halted three months of declines in December and rebounded on strong truck sales.

Sales were up 4.8% to a seasonally adjusted 140,270 units, versus market expectations of a 3% increase.

While most market activity in Canada will be shut down on Monday because of the the Family Day holiday in Ontario, not all of the country is affected, and in Vancouver, Bank of Canada Governor Mark Carney will speak on the topic of "The Implications of Globalization for the Economy and Public Policy" at 4:15 p.m. EST (2115 GMT).

The text of his speech will be released at 4:00 p.m. EST (2100 GMT).

It will be followed by a news conference at 5:15 p.m. EST (2215 GMT).

These are the exchange rates at 3:39 p.m. EST (2039 GMT), 8:00 a.m. EST (1300 GMT), and late Thursday.

   USD/CAD     1.0086     0.9989     0.9994
  EUR/CAD     1.4812     1.4640     1.4629
  CAD/JPY     106.89     107.78     108.21