October 31, 2012 / 1:57 PM / 5 years ago

Canada dollar weakens as data shows economy shrank in August

2 Min Read

TORONTO (Reuters) - The Canadian dollar weakened versus the U.S. currency and bond prices rose on Wednesday after data showed the Canadian economy contracted unexpectedly in August.

The gross domestic product data pointed to slower growth in the third quarter and supported the central bank's message that interest rate hikes are not imminent.

"It's an important number but it's an early number. We've still got a fair chunk of monthly numbers to wade through," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.

Still, the currency reacted sharply to the news, weakening below parity with the greenback.

At 9:09 a.m. (1309 GMT) the Canadian dollar was trading at C$1.0009 to the greenback, or $0.9991, compared with C$0.9985 just before the data, and with C$0.9993, or $1.0007, at Tuesday's North American close.

Chandler said the currency could be weighed down by the August GDP numbers, which showed a 0.1 percent contraction, through to the end of the week.

"It'll linger for a little bit, the only thing that could change the tune on this is we have payrolls," he said. Canada and the United States are set to release monthly employment data on Friday.

U.S. equity markets opened on Wednesday for the first time this week after shutting their doors ahead of Hurricane Sandy. .N

With the GDP data backing up recent Bank of Canada comments that rate rises are "less imminent", the price of Canadian government debt turned positive after the data, especially at the front end of the curve, and outperformed U.S. Treasuries.

The two-year bond was up 4 Canadian cents to yield 1.081 percent, while the benchmark 10-year bond rose 13 Canadian cents to yield 1.796 percent.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders pulled their bets on the possibility of a rate hike in late 2013.

Editing by Jeffrey Hodgson; Editing by Peter Galloway

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