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TORONTO (Reuters) - The Canadian dollar was undercut by a much weaker than expected December jobs report on Friday, which knocked the currency back by more than a cent against the U.S. dollar.
Bond prices rose across the curve as investors bet there would be more bad news for Canada as a result of the economic slowdown in the United States,
The Canadian dollar closed at 98.07 U.S. cents, valuing a U.S. dollar at C$1.0197, down from 99.27 U.S. cents, or C$1.0074, at Thursday's close.
For the week, the Canadian dollar ended down 1.8 percent .
After three straight months of red-hot growth, the Canadian economy unexpectedly shed 18,700 jobs in December. The median forecast in a Reuters poll was for 15,000 jobs to be created.
The job losses came as the softening U.S. economy, along with the strong Canadian currency, battered manufacturers.
Finance Minister Jim Flaherty said on Friday that the factors leading to the job loses were still in place and further losses in the forestry and manufacturing sectors should be expected.
"We are going through a bit of a rough patch and we can anticipate that for months now we will see some job reductions in those sectors," Flaherty said.
The jobs report came on the heels of a string of weak economic numbers, solidifying market expectations that the Bank of Canada will cut its key overnight rate, currently at 4.25 percent, later this month.
Before the dust could settle from the jobs report, another piece of domestic data came in, but this time surprising to the upside.
Canada's trade balance widened to C$3.70 billion from C$3.13 billion in November, said Statistics Canada.
Exports grew by 3.1 percent to C$37.91 billion, outpacing import growth of 1.7 percent to C$34.21 billion.
Analysts polled by Reuters had expected a November surplus of C$3.30 billion.
There was no reaction seen in the Canadian currency.
"Clearly the Canadian dollar is in a zone here where it's weakening on bad news and not improving on factors that should be bullish," said Doug Porter, deputy chief economist at BMO Capital Markets.
"It does seem like sentiment has really turned on the Canadian dollar in 2008."
Canadian bond prices surged in anticipation of an interest rate cut, and the possibility of more to come after that.
Two-year and 10 year bond yields fell to their lowest points since September 2005.
"The 10-year (bond yield) at 3.8 percent in my view is unsustainable," said Carlos Leitao, chief economist at Laurentian Bank.
"If yields were to stay this low, it would mean that there is a really nasty recession coming down the pipeline, which I don't think is the case."
The economy is set to slow down, but we will still see positive growth in Canada throughout the year, said Leitao.
The two-year bond was up 30 Canadian cents at C$101.82 to yield 3.240 percent. The 10-year bond rose 56 Canadian cents to C$101.57 to yield 3.798 percent.
The yield spread between the two-year and 10-year bond was 55.8 basis points, up from 46.1 at the previous close.
The 30-year bond was up 63 Canadian cents at C$116.31 to yield 4.046 percent. In the United States, the 30-year treasury yielded 4.378 percent.
The three-month when-issued T-bill yielded 3.67 percent, down from 3.75 percent at the previous close.