TORONTO (Reuters) - The Canadian dollar shot higher versus the U.S. dollar on Friday thanks to a stellar domestic jobs report, but it later backed off its session high, and suffered its first weekly loss in three weeks.
Canadian bond prices ended higher across the curve as early data related losses were considered overdone by some, while the bigger U.S. Treasury market offered a positive bid.
The Canadian dollar closed at US$1.0002, valuing a U.S. dollar at 99.98 U.S. cents, up from 98.93 U.S. cents, which values a U.S. dollar at C$1.0108, at Thursday's close.
Figures that showed the economy added four times more jobs than expected in January got the ball rolling for the Canadian dollar, which reached a session high of US$1.0053, valuing a U.S. dollar at 99.47 Canadian cents.
Heading into the session, the Canadian dollar was down about 1.3 percent on the week and looked set for more losses. But the surprising jobs data helped it rally and check out of the week down just 0.5 percent.
"It came out of nowhere," said David Watt, senior currency strategist at RBC Capital Markets. "It really looked like we were just going to have a piddly month of job gains ... but the Canadian economy is looking resilient."
According to Statistics Canada, the economy added 46,400 positions, while the unemployment rate returned to October's 33-year low of 5.8 percent from December's 6.0 percent.
But the Canadian dollar could not hang on to its gains as traders started to consider that the slowdown in the United States will eventually work its way into Canada.
The Canadian dollar's upward potential is expected to be minimal as the Canadian economy may start feeling fallout from the United States during the second half of 2008.
"People are beginning to question if the Canadian jobs numbers just offset some of the downside risks that we've seen or if it has changed the perception," Watt said. "I don't think it's changed the perception."
Other Canadian data that offered early support to the Canadian dollar showed housing starts rose 20.6 percent in January to a seasonally adjusted annualized rate of 222,700 units from 184,700 units in December.
Canadian bond prices rebounded to finish higher as a rally in the bigger U.S. Treasury market convinced many investors to rethink an early selloff.
The sharp data forced investors to question the speed at which the Bank of Canada will cut interest rates in response to the U.S. slowdown.
"The initial reaction was perhaps a little too strong," said Carlos Leitao, senior economist at Laurentian Bank of Canada in Montreal. "But Canada can't really deviate much from the U.S. trends on the bond market so in the afternoon we moved closer in line with what was going on there."
The two-year bond rose 1 Canadian cents to C$102.04 to yield 3.073 percent. The 10-year bond increased 30 Canadian cents to C$101.40 to yield 3.819 percent.
The yield spread between the two- and 10-year bond was 74.6 basis points, down from 74.7 points at the previous close.
The 30-year bond rose 60 Canadian cents to C$113.60 to yield 4.189 percent. In the United States, the 30-year treasury yielded 4.425 percent.
The three-month when-issued T-bill yielded 3.28 percent, unchanged from the previous close.