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TORONTO (Reuters) - The Canadian dollar bounced off a two-and-a-half-week low against the U.S. dollar on Monday morning, reversing a data-related stumble during the holiday-shortened preceding week.
Domestic bond prices fell across the curve as dealers adjusted positions following exaggerated moves last week when weak data sparked rallies.
At 9:10 a.m. (1410 GMT), the Canadian dollar was at US$1.0015, valuing a U.S. dollar at 99.85 Canadian cents, up from 99.87 U.S. cents, or C$1.0013, at Friday's close.
During the overnight session, the Canadian dollar had fallen to 99.21 U.S. cents, or C$1.008, its lowest level since December 19, as gold and oil prices came off recent highs.
The overnight slide extended Friday's one-cent drop after the Ivey Purchasing Managers Index, not normally a market mover, showed Canadian purchasing activity sagged in December.
"I think what we're seeing in markets overall is a bit of a reversal from Friday's very big move," said Doug Porter, deputy chief economist at BMO Capital Markets.
"Markets may have pulled a little too far to one side of the boat on Friday and that's especially true for the Canadian dollar's response to the Ivey index."
The hit from the data knocked the Canadian dollar down 2.1 percent during a week that had seen it rally sharply as oil and gold prices both hit record highs -- a positive for the currency as Canada is a key energy and gold producer.
Porter suggested the first full week of 2008 will offer a better indication of where the trends for the Canadian dollar lie given more normal trading conditions, key data and a speech on Tuesday from Bank of Canada Deputy Governor Sheryl Kennedy.
Kennedy's comments, expected to echo the recent remarks of Bank of Canada officials that have leaned mildly to the dovish side, will be followed by key domestic jobs data on Friday.
The jobs report is expected to show a slowdown after three straight months of solid gains, leave the door open for a possible Bank of Canada interest rate cut on January 22.
Canadian bond prices handed back a portion of the sharp gains of last week when a dismal U.S. jobs reports and the weak Ivey data sparked demand for more secure assets like government debt.
"Similar to the U.S., we're just seeing a reversal from Friday's big gains," said Porter.
Canadian yields are higher than U.S. yields right across the curve out to 10 years, which Porter said suggested a market view that the U.S. Federal Reserve will be more aggressive than the Bank of Canada.
Recent U.S. data has raised the possibility that the Fed could cut rates by as much as half a percentage point at its January 29-30 meeting, while the Bank of Canada is only expected to cut rates by 25 basis points later this month.
The overnight Canadian Libor rate was at 4.2033 percent, down from 4.2183 percent on Friday.
Thursday's CORRA rate was at 4.2498 percent, up from 4.2562 percent on Friday. The Bank of Canada publishes the previous day's rate at around 9 a.m. (1400 GMT) daily.
The two-year bond was down 4 Canadian cents at C$101.21 to yield 3.579 percent. The 10-year bond was off 11 Canadian cents at C$100.70 to yield 3.910 percent.
The yield spread between the two-year and 10-year bond was 33.1 basis points, down from 33.6 at the previous close.
The 30-year bond fell 33 Canadian cents to C$115.59 to yield 4.084 percent. In the United States, the 30-year treasury yielded 4.388 percent.
The three-month when-issued T-bill yielded 3.78 percent, unchanged from the previous close.
Editing by Bernadette Baum