TORONTO (Reuters) - The Canadian dollar rose above parity versus the U.S. dollar on Thursday as lofty oil prices helped it recover losses suffered after weak manufacturing sales data supported calls for more Bank of Canada rate cuts.
Domestic bond prices were sitting higher across the curve as the latest domestic economic data showed the weakening U.S. economy is having an impact on Canada.
At 9:30 a.m. EDT, the Canadian currency was at US$1.0001, valuing a U.S. dollar at 99.99 Canadian cents, up from C$1.0043 to the U.S. dollar, or 99.57 U.S. cents, at Wednesday's close.
The Canadian currency fell as low as C$1.0025 to the U.S. dollar, or 99.75 U.S. cents, after the data was released, but it slowly crept back and hit US$1.0008, valuing a U.S. dollar at 99.92 Canadian cents.
The ailing U.S. economy and an ongoing slump in the auto industry were blamed for the unexpectedly sharp 1.6 percent drop in Canadian manufacturing sales in March after two months of gains. Analysts were looking for a 0.2 percent rise.
According to Eric Lascelles, chief economics and rates strategist at TD Securities, the manufacturing sales report makes the Bank of Canada's assumption of 1 percent growth in the first quarter too rosy.
"It doesn't look like the economy is going to quite hit that based on this number and in turn I think you can make a pretty good case for not just more Bank of Canada rate cutting but a fair bit more," said Lascelles.
"It really is coming through that Canada is being quite exposed to this U.S. slowdown... this was not a particularly friendly or healthy report in Canada."
The Bank of Canada is widely expected to lower its key overnight rate by 25 basis points to 2.75 percent at its next fixed announcement data on June 10. After that, expectations range from no change in rates to a cut of 50 basis points.
The rebound in the commodity-linked Canadian dollar after the data was attributed mainly to oil prices that headed back toward $125 a barrel to recover losses from Wednesday.
Canadian bond prices were sitting higher across the curve given the weaker-than-expected manufacturing data.
"It does look like Canadian bonds prices are slightly outperforming the U.S. (Treasury market) and I think you can motivate that with the data," said Lascelles.
The Bank of Canada's quarterly review is due at 10:30 a.m. but is not expected to have much impact on financial markets.
There are no more data due out in Canada this week but next week a slew of reports are slated for release, including April inflation data on Wednesday and March retail sales figured the following day.
The two-year bond rose 3 Canadian cents to C$101.86 to yield 2.802 percent. The 10-year rose 9 Canadian cents to C$103.14 to yield 3.589 percent.
The yield spread between the two- and 10-year bonds was 78.7 basis points, down from 77.7 at the previous close.
The 30-year bond climbed 20 Canadian cents to C$116.15 for a yield of 4.049 percent. In the United States, the 30-year treasury yielded 4.641 percent.
The three-month when-issued T-bill yielded 2.65 percent, down from 2.68 percent at the previous close.
Editing by Renato Andrade