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

Wed Aug 31, 2016 4:32pm EDT
 
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(Adds analyst quotes, updates prices)
    * Canadian dollar ends at C$1.3116, or 76.24 U.S. cents
    * Loonie touches its weakest since Aug. 9 at C$1.3145
    * 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 data showed a deeper contraction in the country's
economy for the second quarter than the Bank of Canada had
projected.    
    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. 
    The Bank of Canada had forecast a 1 percent contraction.
    Still, there were signs that a pickup was already underway.
The economy grew 0.6 percent in June.
    "I don't think today's numbers really put the Bank of Canada
in play for next week," said Bipan Rai, executive director,
macro strategy at CIBC Capital Markets.    
    Investors are betting that the central bank will leave
policy unchanged at both next week's interest rate decision and
through the end of the year, overnight index swaps data shows.
 
    The interest rate decision in October will be more important
for the market when the central bank will have more data to
assess whether the economy has rebounded in the third quarter as
it has forecast, Rai said.
    The Canadian dollar ended at C$1.3116 to the
greenback, or 76.24 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$1.3145.
    For the month, the loonie fell 0.5 percent.
    U.S. crude prices settled $1.65 lower at $44.70 a
barrel, pressured by government data that showed a large rise in
U.S. crude stockpiles. 
    Oil is one of Canada's major exports.
    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.
    Increased chances of a U.S. rate hike came as a report by a
payrolls processor showed U.S. private employers added 177,000
jobs in August.
    The U.S. Labor Department's more comprehensive non-farm
payrolls report is due for release on Friday, which may offer
clues on the outlook for U.S. interest rates.
    Canadian government bond prices were mixed, with the
two-year bond up 1.5 Canadian cents to yield 0.579
percent and the benchmark 10-year flat to yield
1.022 percent.

 (Reporting by Fergal Smith; Editing by W Simon and Chris Reese)