Risk Aversion Clips Loonie's Wings. By Nicholas Hastings

The loonie may be ready for take off but its wings are clipped by risk aversion for now.

In fact, the prospects for the Canadian currency may now be surpassing those of its commodity cousin, the Australian dollar.

But, investors in both currencies are likely to hang back - waiting for more evidence of the global recovery and looking for a more sustainable rally in equities.

Optimism about the Canadian economy has already lifted the Canadian currency quite sharply against its U.S. counterpart this month, with a gain over 2% in the last five days alone.

Sentiment was driven not only by positive economic news and an upturn in commodity prices but by a break of the dollar under the 40-day moving average at CAD1.1336.

Technical analysts at RBC Capital Markets reckon that a hold under this level could well drive the U.S. currency down to CAD1.1250.

On the economic front, support for the loonie came from the latest second quarter Bank of Canada survey suggesting that loan conditions to industry are improving and that businesses are more optimistic about future sales than they were back in the first quarter of the year.

"All in all the first glimmer of hope concerning the supply of loans to the Canadian economy, and combined with the positive market sentiment, this provided support for the CAD," reported the currency strategy team at Commerzbank.

For the moment, risk appetite is also being helped by the latest signs that commodity demand is on the rise. The Baltic Dry Index, an important indicator of global shipping demand, rose over the key 3,000 level and oil prices rallied back over $61 a barrel.

Of course, this is also good news for other commodity currencies, such as the Australian dollar.

However, strategists at BNP Paribas argue that the Canadian currency could be better placed than its Australian counterpart as they expect the price of crude oil to rebound faster than those of base metals as energy demand from Asia and Latin America soars.

"Growth in these areas will be energy intensive," the strategists said, noting that rising volatility and declining risk appetite should support a lower Australian dollar against the Canadian currency.

In the meantime, of course, caution over the global recovery, a fairly insipid performance by equities and a fairly low level of risk appetite means any serious rally in the loonie will have to wait.

Some reckon the U.S. dollar could still make it back up to CAD1.15 or so if risk aversion rises again or if Canadian officials, keen to keep the loonie competitive, suggest that its gains are all speculative.

Risk aversion remained a factor early Thursday in Europe. Although China reported second quarter growth of 7.9%, above the 7.7% consensus forecast, the market was disappointed it hadn't come in over 8% and chose to focus more on fears that CIT Group may file for bankruptcy on Friday as it probably won't receive a Treasury bailout.

By 0645 GMT, the dollar had fallen to Y94.03 from Y94.36 late on Wednesday in New York, according to EBS. The dollar is also up at CAD1.1190 from CAD1.1155.

The euro was down at $1.4078 from $1.4112 and at Y132.34 from Y133.12 even though equities remained buoyant with the Nikkei gaining 0.8% on the day.