CANADA FX DEBT-C$ weakens as data shows economy shrank in August

Wed Oct 31, 2012 9:53am EDT
 
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* C$ at C$1.0009 to US$, or $0.9991
    * Canada GDP data shows 0.1 percent contraction in August
    * Rate rise seen pushed farther out, bond prices rise

    By Alastair Sharp
    TORONTO, Oct 31 (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.
 
    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.