October 21, 2016 / 8:47 PM / a year ago

CANADA FX DEBT-C$ tumbles to 7-month low as soft data fuels rate cut bets

(Adds analyst quotes and details on weekly performance, CFTC
data, free trade talks and updates prices)
    * Canadian dollar at C$1.3327, or 75.04 U.S. cents
    * Loonie touches its weakest since March 16 at C$1.3354
    * Speculators increase C$ bearish bets to the most since
March
    * Bond prices higher across the yield curve
    * Canada-U.S. 2-year spread hits widest in 4 months

    By Fergal Smith
    TORONTO, Oct 21 (Reuters) - The Canadian dollar weakened to
a seven-month low against its U.S. counterpart on Friday as
weaker-than-expected domestic data fueled interest rate cut bets
and the greenback made broad-based gains.
    For the week, the loonie fell 1.4 percent, its largest
one-week decline since early May, according to Reuters data.
    A drop in Canadian retail sales in August and
cooler-than-anticipated annual inflation in September reinforced
speculation the Bank of Canada may lower interest rates again,
after the bank acknowledged this week it had considered cutting.
 
    "There is definitely more focus on the Bank of Canada,
therefore more focus on the data. So even a small downside miss
seems to have had a disproportionate impact on the currency,"
said Daniel Katzive, head of FX strategy North America at BNP
Paribas.    
    The implied probability of a Bank of Canada interest rate
cut by mid-2017 jumped to more than 40 percent from around 30
percent before the data, overnight index swaps data showed.
    
    "Not all the move is reflecting simply what is going on in
Canada, because the (U.S.) dollar is stronger pretty much
against everything," Katzive said.
    The U.S. dollar climbed to a 8-month high against a
basket of major currencies.
    The Canadian dollar ended at C$1.3327 to the
greenback, or 75.04 U.S. cents, weaker than Thursday's close of
C$1.3222, or 75.63 U.S. cents.
    The currency's strongest level of the session was C$1.3226,
while it touched its weakest since March 16 at C$1.3354.    
    Losses for the loonie came despite gains for crude oil, one
of Canada's major exports. U.S. crude prices settled 22
cents higher at $50.85 a barrel. 
    Speculators increased bearish bets on the Canadian dollar to
the most since March, Commodity Futures Trading Commission data
showed. Net short Canadian dollar positions rose to 14,298
contracts in the week ended Oct. 18 from 11,704 in the prior
week.
    Canadian government bond prices were higher across the yield
curve, with the two-year up 6.5 Canadian cents to
yield 0.52 percent and the benchmark 10-year rising
44 Canadian cents to yield 1.126 percent.
    The 2-year yield fell 4.1 basis points further below its
U.S. equivalent, to leave a spread of -31.2 basis points, its
widest since June 2, indicating outperformance for Canadian
government bonds.
    Canada's trade minister walked out of talks in Belgium,
declaring that the European Union was incapable of sealing a
planned transatlantic free trade deal designed to boost growth
in both economies.    

 (Reporting by Fergal Smith; Editing by Sandra Maler)

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