TORONTO (Reuters) - The Canadian dollar dropped to its lowest level in nearly a week on Monday as data showed the economy slowed in the fourth quarter, supporting calls for the biggest Bank of Canada rate cut in years.
Domestic bond prices moved higher on the short end of the curve immediately after the weak gross domestic product data, but long end prices remained under pressure.
At 9:45 a.m. EST, the Canadian dollar was at US$1.0127, valuing a U.S. dollar at 98.75 Canadian cents, down from US$1.0159, valuing a U.S. dollar at 98.43 Canadian cents, just ahead of the data.
The domestic currency fell as low as US$1.0097, or 99.03 Canadian cents, after the report. It closed at US$1.0158, or 98.44 Canadian cents on Friday, in a week where the currency rose nearly 3 percent.
But those gains were almost entirely wiped out in a sudden swoop that was triggered by data that showed a lofty Canadian dollar weighed on exports and slowed annualized economic growth in the fourth quarter by more than expected.
The data support expectations for the Bank of Canada to cut its key interest rate by 50 basis points to 3.50 percent on Tuesday.
The central bank lowered its key rate by 25 basis points in December and January, but a half-percentage point cut would be its biggest cut since late 2001 just after the September 11 attacks on the United States.
"It's got the market basically pricing in a 50-basis-point cut at tomorrow's meeting and as a result of that weaker data we've seen the Canadian dollar weaken off," said George Davis, chief technical strategist at RBC Capital Markets.
A Reuters poll conducted on February 29 showed most of Canada's primary dealers expect a 50-basis-point cut in the overnight rate to 3.50 percent.
The fall in the Canadian dollar marked a sharp turnaround from last week when it hit its highest level in three months given the lofty commodity price backdrop.
Short-dated Canadian bond prices enjoyed a boost given the widespread expectations for a hefty Bank of Canada rate cut on Tuesday, but priced on the long end of the curve mirrored a decline in the bigger U.S. Treasury market.
BMO Capital Markets Senior Economist Sal Guatieri said the weak GDP data ratchets up the odds of a 50-point Bank of Canada rate cut, but figures that showed the economy contracted by 0.7 percent in December also set the stage for a weak first quarter GDP report.
Guatieri also said lofty gold prices supported concerns of inflation and weighed on the longest end of the U.S. Treasury market, which he felt also weighed on Canada's long end.
The overnight Canadian Libor rate was 4.0533 percent, down from 4.1000 percent on Friday.
Friday's CORRA rate was 4.0191 percent, up from 4.0029 percent on Thursday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond rose 7 Canadian cents to C$102.54 to yield 2.740 percent. The 10-year bond gained 5 Canadian cents to C$102.88 to yield 3.629 percent.
The yield spread between the two- and 10-year bond was 89.2 basis points, up from 86.1 basis points at the previous close.
The 30-year bond was down 2 Canadian cents at C$115.46 to yield 4.088 percent. In the United States, the 30-year Treasury yielded 4.443 percent.
The three-month when-issued T-bill yielded 3.03 percent, down from 3.08 percent at the previous close.
Editing by Renato Andrade