The Canadian dollar slipped below 90 cents US Monday, its lowest point since July of 2009.
The loonie closed at 89.96 US after gaining ground earlier in the session, as concern over emerging market currencies snowballed.
The steep slide in stocks that began last week slowed on Monday in U.S. markets, but Toronto stocks continued their drop, hurt by falling gold prices and a dip in oil and natural gas prices.
The TSX/S&P index was down 135 points, or one per cent, to 13,582 at the end of the day. The Dow ticked down 41 points to 15,837 after making gains earlier in the day, and the Nasdaq exchange was down 44 points at 4,083.
It's just the beginning of a year of volatile markets, according to CBC's The Lang & O'Leary Exchange host Kevin O'Leary.
"This 2014 year is going to have a lot of volatility and for a wide range of reasons. China will be one, earnings will be another, debt ceiling coming February to a theatre near you will be a third," he said, referring to the looming U.S. debt ceiling.
Investors were buoyed by news that Turkey had stepped up its defence of the lira on Monday. The central bank called a crisis meeting for Tuesday to discuss the country’s monetary and economic policy after the Turkish currency hit a record low against the U.S. dollar.
Money streaming out of emerging market currencies and into the U.S. dollar was a major contributor to the slide in markets last week. Asian markets continued to fall Monday, but not as steeply.
Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis, said emerging markets are less attractive for investors with U.S. interest rates pushing a little higher with the Fed's moves.
"So we're seeing capital move out of those countries, pushing their currencies down," Fehr said. "These countries that have really benefited from capital [inflows] in the past couple of years are now disproportionately disadvantaged from money moving out of their markets."
China's troubled banks
In more positive news, Industrial and Commercial Bank of China stepped in to stop the default of China Credit Trust Co., a sign that China is prepared to rescue its troubled shadow banks.
China also clamped down on cash transfers ahead of the Lunar New Year in a move that may be intended to prevent speculation on the yuan ahead of an announcement by the U.S. Federal Reserve later this week.
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Analysts expect the Fed to further taper its bond purchases by another $10 billion US a month, to $65 billion US a month. Some analysts had suggested the bond-buying program, in place since 2010, had led to an asset bubble in the market, so last week’s correction on stock markets seems overdue.
But investors are unsure whether to expect good news or bad as both Canada and the U.S. release their economic growth figures later this week.
U.S. economic data mixed
Economic data out of the U.S. is mixed. Sales of new homes in the U.S. dropped seven per cent in December to a seasonally adjusted annual rate of 414,000, but figures for the full year were stellar, rising to the highest level in five years.
U.S. investors favoured industrial stocks after Caterpillar reported higher than expected earnings of $1 billion, or $1.54 per share.
In Canada, traders beat down financial stocks, including National Bank and Scotiabank, because their 2014 outlook could be affected by interest rate hikes.
The gold sector was down 0.8 per cent after February bullion fell $3.70 to $1,260.60 US an ounce.
On the commodity markets, the March crude oil contract on the New York Mercantile Exchange also shed early gains, losing 92 cents to $95.72 US a barrel. Natural gas prices also dipped.
The falling Canadian dollar is seen as good news for exporters and for the tourism industry, which will attract more visitors to Canada. But Canadians heading south for vacations are getting hit in the pocketbook and may eventually pay more for retail goods.