CANADA FX DEBT-C$ slides on soft Canadian GDP, U.S. dollar flows

Fri Oct 31, 2014 4:47pm EDT
 
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(Updates with fresh comment, new details, closing figures)
    * Canadian dollar at C$1.1286 or 88.61 U.S. cents
    * Bond prices mostly weaker across the maturity curve

    By Solarina Ho
    TORONTO, Oct 31 (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 
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 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 bond up 2.5
Canadian cents to yield of 1.025 percent. The benchmark 10-year
 lost 2 Canadian cents to yield 2.049 percent.    

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