CANADA FX DEBT-C$ weakens to 3-week low as oil falls

Wed Aug 31, 2016 9:49am EDT
 
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* Canadian dollar at C$1.3125, or 76.19 U.S. cents
    * Loonie touches its weakest since Aug. 9 at C$1.3134
    * Bond prices mixed across the maturity curve

    By Fergal Smith
    TORONTO, Aug 31 (Reuters) - The Canadian dollar weakened to
a three-week low against its U.S. counterpart on Wednesday as
oil fell and government data showed a deep contraction in the
country's economy for the second quarter.
    Canada's economy shrank at an annualized 1.6 percent rate in
the second quarter in its worst showing in seven years, hurt by
a drop in exports and a disruption to oil production caused by
wildfires in northern Alberta, according to data from Statistics
Canada. 
    Still, there were signs that a pick up was already underway.
The economy grew 0.6 percent in June.
    "With the strong GDP numbers for June ... they (the Bank of
Canada) may be of the view that they could get a stronger
rebound in Q3 GDP than the 3.5 (percent) they have assumed,"
said Paul Ferley, assistant chief economist, Royal Bank of
Canada.
    He expects the central bank to "stay on the sidelines."
    The implied probability of either a central bank rate hike
or a rate cut by the end of the year was nearly zero, overnight
index swaps data showed. Before the data a 4 percent probability
of a rate cut was implied. 
    At 9:20 a.m. EDT (1320 GMT), the Canadian dollar 
was trading at C$1.3125 to the greenback, or 76.19 U.S. cents,
weaker than Tuesday's close of C$1.3096, or 76.36 U.S. cents.
    The currency's strongest level of the session was C$1.3080,
while it touched its weakest since Aug. 9 at C$1.3134.
    U.S. crude prices were down 0.97 percent at $45.90 a
barrel, pressured by a strong dollar and high stocks of oil.
 
    Oil is one of Canada's major exports.
    The U.S. dollar extended gains against a basket of
major currencies after a report by a payrolls processor showed
U.S. private employers added 177,000 jobs in August. The figures
come ahead of the U.S. Labor Department's more comprehensive
non-farm payrolls report on Friday, which may offer clues on the
outlook for U.S. interest rates.
    The probability of a Federal Reserve rate increase in
September climbed to 27 percent from 24 percent on Tuesday,
according to the CME Group's FedWatch calculation based on U.S.
short-term interest rate futures.
    Canadian government bond prices were mixed. The two-year
 bond dipped 0.5 Canadian cent to yield 0.589 percent,
and the benchmark 10-year declined 9 Canadian cents
to yield 1.031 percent.

 (Reporting by Fergal Smith Editing by W Simon)