October 31, 2014 / 2:13 PM / 3 years ago

Canadian dollar slides on soft Canadian GDP, U.S. dollar flows

The new Canadian five and 10 dollar bills, made of polymer, are displayed following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

TORONTO (Reuters) - The Canadian dollar dropped to its weakest level in more than a week against its U.S. counterpart on Friday after data showed the country’s economy unexpectedly shrank in August for the first time in eight months.

The currency’s weaker tone was set overnight after the Bank of Japan shocked financial markets around the world by expanding its massive stimulus spending. The move sent the yen JPY= plunging to a near seven-year low against the U.S. dollar.

Meanwhile, inflation data in the euro zone reinforced the view that the European Central Bank would hold off on any policy action at its meeting next week.

“What happened in Japan overnight and Europe (caused) a significant flow to the U.S. dollar, which Canada wasn’t able to keep up with. It started us off on the wrong foot overnight,” said Ken Wills, currency strategist and broker at CanadianForex.

U.S. data showed the pace of business activity growth accelerated more than expected this month, which furthered the flow into U.S. dollars, Wills said.

The Canadian dollar CAD=D4 finished the week at C$1.1271 to the greenback, or 88.72 U.S. cents, significantly softer than Thursday’s close of C$1.1196, or 89.32 U.S. cents.

At one point during the session, the loonie, which was underperforming most of its counterparts, weakened to C$1.1332, or 88.25 U.S. cents.

Wills said there was still room for further Canadian dollar weakness, however, he did not anticipate the currency to break the C$1.1385 level.

In Canada, real gross domestic product fell 0.1 percent in August, hurt by plant maintenance in the oil and gas industry that slowed production and by a drop in manufacturing activity.

“It’s just a bit of an additional headwind. It doesn’t quite buy into the narrative that we’re hoping to see,” said David Tulk, chief Canada macro strategist at TD Securities, who said the GDP drop was not too surprising given fairly weak economic data globally for August.

“Our expectation is that it will reassert itself in September and going into the final quarter of the year.”

In the United States, consumer spending fell for the first time in eight months in September, but the slowdown was expected to be temporary as other data showed the biggest increase in wages in more than six years in the third quarter.

“It’s sort of a perfect storm, where you get the weakness in the Canadian economy ... But also on the U.S. side, you have the employment cost index that was stronger than people had thought,” Tulk said.

“That gives you your perfect storm, insofar as you see that potential momentum in wages under the surface in the United States, which brings the Fed arguably closer to taking rates higher.”

Earlier this week, the U.S. central bank said it was ending its monthly bond purchase program and adopted a more hawkish tone on the economy.

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR bond up 2.5 Canadian cents to yield of 1.025 percent. The benchmark 10-year CA10YT=RR lost 2 Canadian cents to yield 2.049 percent.

Reporting by Solarina Ho; Editing by Peter Galloway and Meredith Mazzilli

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