CANADA FX DEBT-C$ drops to March levels as trade deficit spurs rate-cut bets
* Canadian dollar ends at C$1.2712 or 78.67 U.S. cents * Bond prices higher across the maturity curve By Solarina Ho TORONTO, July 7 (Reuters) - The Canadian dollar tumbled to its weakest close against the greenback since March on Tuesday after data showed Canada posted a bigger-than-expected trade deficit in May, setting the stage for a possible Bank of Canada interest rate cut next week. The C$3.34 billion trade deficit was the second biggest on record and the eighth monthly deficit in a row as exports declined 0.6 percent and imports rose 0.2 percent. The trade numbers were the latest in a string of disappointing data that could force the central bank to make a move to try to stimulate the economy. TD Bank and CIBC are among those already predicting a rate cut. "Today's price action just extends what we've been seeing over the past couple of days in USD/CAD, which is a move to price in further potential for a rate cut," said Greg Moore, senior currency strategist at RBC Capital Markets. The Canadian dollar closed at C$1.2712 to the greenback, or 78.67 U.S. cents, weaker than the Bank of Canada's official finish of C$1.2652, or 79.04 U.S. cents, on Monday. This was well off the C$1.2780 hit earlier in the session, but was still the currency's weakest close since March. Before the trade data on Tuesday, the loonie was already weaker due to Monday's plunge in the price of crude, a major Canadian export, and on safe-haven buying of the U.S. dollar amid ongoing euro zone jitters. "The U.S. dollar is pretty strong today in general, so there's a flight to dollar safety," said Avery Shenfeld, chief economist at CIBC World Markets. "It's not surprising to see the Canadian dollar weaker on a number of fronts, both domestic and global." A partial recovery in crude prices on Tuesday helped pull the currency back from its weakest levels, though U.S. oil still closed lower following a fairly volatile session. Oil prices are expected to remain vulnerable due to concern about China's stock market losses and Greece leaving the euro zone. "I do think this is the beginning of a pretty active couple of weeks. We haven't seen the end of the volatility in CAD," Moore said. Canadian government bond prices were higher across the maturity curve, with the two-year price up 3 Canadian cents to yield 0.465 percent and the benchmark 10-year rising C$1.13 to yield 1.578 percent. The Canada-U.S. two-year bond spread was -12.4 basis points, while the 10-year spread was -68.0 basis points. (Reporting by Solarina Ho; Editing by Peter Galloway)
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