TORONTO (Reuters) - The Canadian dollar firmed against the U.S. dollar on Friday, supported by economic data that was slightly above market expectations and showed the Canadian economy has so far held up well in the face of the economic morass created by the global credit crunch.
Domestic bond prices were lower after the data, as the figures may lessen the chance that the Bank of Canada will have to cut interest rates as aggressively as once thought in order to contain the damage from the slowdown.
At 10:06 a.m., the Canadian dollar was at US$1.0062, valuing each U.S. dollar at 99.38 Canadian cents, up from US$1.0001, or 99.99 Canadian cents to the U.S. dollar, at Thursday's close.
Canada's economy grew by 0.2 percent in October from September, fueled mainly by increases in manufacturing and wholesale trade, Statistics Canada said.
Market analysts had on average forecast the economy would grow by 0.1 percent.
"After October's decent, but certainly not stellar, GDP report, Q4 economic growth appears to be off to a reasonable start," said Jacqui Douglas, economics strategist at TD Securities in a note.
"Even if November and December GDP were to come in flat, Q4 GDP is still on pace for 1.4 percent annualized growth, which is rather impressive considering the slowdown in the U.S. and the massive appreciation in the Canadian dollar."
The Canadian dollar hit parity with the greenback for the first time in 31 years in September on the back of robust commodities prices, a strong domestic economy and a weakening greenback.
It continued its run to a modern-day high in November, topping US$1.10 on November 7, before abruptly retracing its gains, dropping more than 10 percent in less than a month.
Other data from Statistics Canada showed that retail sales edged up by 0.1 percent in October from September, beating the average call by market analysts of a 0.2 percent decline.
The data gave a slight boost to the Canadian dollar, but investors held off from making any big moves, in part because of the illiquid holiday markets, and also because of concerns about credit markets, said David Powell, currency analyst at IDEAglobal in New York.
"The rational behind the Bank of Canada's U-turn on monetary policy we've seen recently was not necessarily soft economic data, it was more concern about the malfunctioning credit markets in Canada and the potential effects it might have on the economy moving forward."
Bond prices fell after the solid data made some analysts question the likelihood that interest rates in Canada will fall much further from current levels.
"I think it makes the case for fewer (interest rate) cuts as opposed to more," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"I still think a January cut is a reasonable bet given how soft inflation has gotten, but I'm not sure there's going to be a protracted rate cutting cycle in store for Canada going forward."
The overnight Canadian Libor rate LIBOR01 was at 4.2467 percent, down from 4.2500 percent on Thursday.
Thursday's CORRA rate edged down to 4.2446 percent, from 4.2532 percent on Wednesday. The Bank of Canada publishes the previous day's rate at around 9:00 a.m. daily.
The two-year bond slipped 4 Canadian cents to C$100.84 to yield 3.792 percent. The 10-year bond dipped 2 Canadian cents to C$99.99 to yield 4.001 percent.
The yield spread between the two-year and 10-year bond was 20.9 basis points, down from 21.2 basis points at the previous close.
The 30-year bond slid 7 Canadian cents to C$115.44 to yield 4.092 percent. In the United States, the 30-year treasury yielded 4.499 percent.
The three-month when-issued T-bill yielded 3.87 percent, unchanged from the previous close.
Editing by Janet Guttsman