September 11, 2008 / 2:20 PM / in 9 years

Canadian dollar weakens after soft trade data

* Canada's July trade surplus falls short of expectations

* Lower oil prices also weighing on Canadian dollar

* Bond prices bounce back after the previous session's drop

By Frank Pingue

TORONTO, Sept 11 (Reuters) - The Canadian dollar fell versus the U.S. dollar on Thursday after data showed Canada's trade surplus narrowed more than expected in July.

Domestic bond prices were higher across the curve alongside the bigger U.S. Treasury market given the Canadian data and a report that showed the number of U.S. workers filing first-time claims for jobless benefits was higher than expected.

At 9:30 a.m. (1330 GMT), the Canadian unit was at C$1.0732 to the U.S. dollar, or 93.18 U.S. cents, down from C$1.0697 to the U.S. dollar, or 93.48 U.S. cents, at Wednesday's close.

The Canadian dollar was knocked back and forth early in the session as the market was torn between unloading the currency on the weaker domestic data or selling the U.S. dollar after a report showing a wider U.S. trade deficit for July.

After the two reports, the Canadian dollar bounced around in a range of C$1.0743 to the U.S. dollar, and C$1.0700 to the U.S. dollar before finally settling below its pre-data level.

Another drag on the Canadian dollar were oil prices that neared a five-month low, which is negative for the Canadian currency as Canada is a big crude exporter.

"At the end of the day, given the fact that crude oil prices are a little bit softer, the broader trend in the U.S. dollar is up," said George Davis, chief technical strategist at RBC Capital Markets.

"And I think that the market is likely to place a little more attention on the domestic number and look to take dollar Canada back up today."

Still, the Canadian currency was well off the overnight low of C$1.0773 to the U.S. dollar or 92.82 U.S. cents, that it tumbled to overnight as a bout of U.S. dollar strength gave way to profit taking.

The Canadian dollar will now likely be dictated by moves in commodity prices and the U.S. dollar given the lack of any key domestic economic data for the remainder of the week.

BOND PRICES ALL HIGHER

Canadian bond prices bounced back after dropping the previous session, boosted by data from both sides of the border that triggered an appetite for more secure assets like government debt.

Bonds have been rallying in recent weeks given the steep stock market selloff, but they slipped a touch in Wednesday's session as a stock market rally took the legs out from under the recent safe-haven bid for bonds.

But a U.S. report that showed U.S. jobless claims were down last week, but not by as much as expected, kept the longer-term trend toward a weakening labor market intact.

"Data-wise, the high level of initial jobless claims likely points to growing job losses and as well the Canadian trade report was weaker than expected, suggesting that trade will continue to carve a big slice out of GDP growth," said Sal Guatieri, senior economist at BMO Capital Markets.

The Canadian economy narrowly avoided a recession in the second quarter as the economy grew 0.3 percent after shrinking by 0.8 percent in the first quarter.

The two-year bond was up 6 Canadian cents at C$100.15 to yield 2.681 percent, while the 10-year rose 17 Canadian cents to C$106.67 to yield 3.435 percent.

The yield spread between the two-year and 10-year bond was 79.0 basis points, up from 76.1 basis points at the previous close.

The 30-year bond increased 24 Canadian cents to C$118.44 for a yield of 3.923 percent. In the United States, the 30-year Treasury yielded 4.184 percent.

The three-month when-issued T-bill yielded 2.39 percent, down from 2.41 percent at the previous close. (Editing by Frank McGurty)

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