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TORONTO (Reuters) - The Canadian dollar limped to a lower close versus the U.S. dollar on Friday and capped off its first losing week in three after a thin, quiet session in which moves were amplified because U.S. markets were closed for Independence Day.
Canadian bond prices, which underperformed the U.S. Treasury market all week, continued to benefit from pared expectations for U.S. Federal Reserve interest rate hikes and ended higher across the curve.
The Canadian dollar closed at C$1.0200 to the U.S. dollar, or 98.04 U.S. cents, down from C$1.0188 to the U.S. dollar, or 98.15 U.S. cents, at Thursday's close.
For the week the Canadian dollar fell 0.9 percent.
But the drop in the Canadian currency did not draw too much concern in a week of trading made slow by the July 4 U.S. holiday and Tuesday's Canada Day holiday.
"Liquidity is much lower than usual and not surprisingly the markets are illiquid," said Matthew Strauss, senior currency strategist at RBC Capital Markets. "But the move that we did see today in the Canadian dollar was more driven by flows rather than any strong directional bids."
That explains why the Canadian dollar rallied to C$1.0151 to the U.S. dollar, or 98.51 U.S. cents, during the first half of the North American session before trickling lower.
The only Canadian data to consider in the session, the Ivey Purchasing Managers Index, showed business purchasing activity increased more than expected in June but also signaled the jobs market may be weakening.
But the few traders in attendance in the muted session did not show much interest in the data since the Bank of Canada's Business Outlook Survey is due out Monday and the domestic June jobs data on July 11.
The June jobs figures, the last data the Bank of Canada will consider ahead of its scheduled interest rate decision on July 15, is expected to show the economy created 10,000 jobs in June, while the unemployment rate was 6.1 percent.
After underperforming U.S. Treasuries all week, Canadian bonds managed to make up some ground with the U.S. Treasury market closed and dealers still believing the U.S. Federal Reserve is not set to raise interest rates.
"This week the view started to shift towards more of a view that the Fed is not going to raise rates any time soon," said Carlos Leitao, chief economist at Laurentian Bank of Canada in Montreal. "Inflation concerns are important, yes, but the (U.S. economy) is still very week and hence the (Fed) is not going to rock the boat."
The Ivey Purchasing Managers Index showed Canadian business purchasing activity rose to 69.6 in June from 62.5 in May. That was better than market expectations for a reading of 62.0.
The Ivey employment index dropped to 58.2 from 59.3 in the previous month, while the prices index climbed to 84.1 from 82.9.
The two-year bond rose 4 Canadian cents to C$101.04 to yield 3.179 percent. The 10-year bond increased 25 Canadian cents to C$102.18 to yield 3.710 percent.
The yield spread between the two-year and 10-year bond was 53.1 basis points, down from 53.6 at the previous close.
The 30-year bond rose 23 Canadian cents to C$115.95 for a yield of 4.057 percent. In the United States, the 30-year Treasury yielded 4.535 percent.
The three-month when-issued T-bill yielded 2.49 percent, down from 2.51 percent at the previous close.
Reporting by Frank Pingue; Editing by Peter Galloway