January 31, 2012 / 10:24 PM / 5 years ago

Canadian dollar pares gains on weak North American data

3 Min Read

TORONTO (Reuters) - The Canadian dollar closed unchanged on Tuesday as soft North American economic data offset support provided by gains in commodity prices on optimism that progress was being made to alleviate the euro zone debt crisis.

Data that showed Canada's economy contracted in November for the first time since May was followed by a steeper-than-expected decline in U.S. home prices in November and flagging U.S. consumer confidence figures for January.

That combination of economic gloom put the brakes on the commodity-driven Canadian dollar's strong overnight push through parity with the greenback to C$0.9966, its highest level in three months.

"Based on the data that we had it didn't make sense for the Canadian dollar to be trading below parity," said Darcy Browne, managing director of capital markets trading at CIBC World Markets.

Canada's dollar finished at C$1.0028 to the U.S., or 99.72 U.S. cents, unchanged from its Monday close. It finished January up 1.7 percent, its first monthly rise since October.

Statistics Canada said real gross domestic product fell 0.1 percent in November. Economists had forecast an increase of 0.2 percent.

The weak data was not expected to alter Bank of Canada monetary policy in the near term but left the market deflated.

"The number was definitely a bit softer than expected, but in terms of policy implications we know the bank's on hold here for some time," said Shaun Osborne, chief currency strategist at TD Securities.

The currency's early highs were reached after the European Union agreed on Monday to a deal that sets strict new measures for sovereign budget discipline to prevent a repeat of the massive overspending that spurred the debt crisis.

Sentiment was also lifted after Greek Prime Minister Lucas Papademos said negotiators had made "significant progress" towards a debt swap deal.

Currency traders had expected investors to unload more U.S. funds before the end of the month to help balance out portfolios that were weighted towards the greenback, but Browne said that didn't happen due to a slide in the euro.

He added that until there's some significant development in the push-pull between a U.S. recovery story and Europe's credit crisis, the Canadian dollar will stay within a tight trading range.

"We need to move like 2 or 3 percent either side of parity for us to see legitimate fresh business come into the market," Browne said. "It would take a move over C$1.04 to see the market get excited, or a sustained move back below C$0.9850."

Canadian government bond prices were mostly higher with the two-year bond up five Canadian cents to yield 0.960 percent. The 10-year bond rose 43 Canadian cents to yield 1.890 percent.

Editing by Peter Galloway

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