Canada dollar pulled lower by oil, rate outlook
* C$ falls 0.5 percent against $US
* IEA will open stockpiles if Gustav disrupts oil output
* Friday's domestic second-quarter GDP report in focus
By John McCrank
TORONTO, Aug 28 (Reuters) - The Canadian dollar eased 0.5 percent against the U.S. dollar on Thursday, due in part to a drop in the price of oil after the International Energy Agency pledged to dip into emergency stockpiles if Tropical Storm Gustav disrupted U.S. oil production.
Domestic bond prices rose as investors bought safe haven assets ahead of Friday's second quarter GDP report for Canada, which many in the market expect to come in on the soft side.
The Canadian dollar was at C$1.0519 to the U.S. dollar, or 95.07 U.S. cents, at 4 p.m. (2000 GMT). This was down from C$1.0468, or 95.53 U.S. cents, in late trading on Wednesday.
The currency had risen to C$1.0432 to the greenback, or 95.86 U.S. cents, early in the session as oil CLc1 topped $120 a barrel.
Oil prices had been rising for days on forecasts that Tropical Storm Gustav would regain hurricane status as it approached the U.S. Gulf, home to a quarter of U.S. oil production. See [ID:nSP204802]
But oil prices unwound, falling below C$116 a barrel after the IEA said it would tap its reserves if production was hit.
The Canadian dollar has been linked increasingly to oil prices as Canada's importance as an energy producer has grown.
Another factor hurting the Canadian dollar was growing expectations that the Bank of Canada would have to cut its key lending rate to shore up softening economic growth.
"You've got the market leaning into the idea that the next move out of the Bank of Canada is a rate cut of some sort," said Stewart Hall, economist at HSBC Canada.
That is in contrast to the market view that the next move by the U.S. Federal Reserve will be a rate hike.
Hall said the market has priced in as much as 50 basis points worth of Bank of Canada interest rate cuts over the medium term.
Canada's main economic report for the week comes Friday with the gross domestic product for the second quarter.
Analysts, on average, expect annualized GDP growth of 0.7 percent, according to a Reuters poll.
In the first quarter, the economy shrank by an annualized 0.3 percent. The common definition of a recession is two back-to-back negative quarters.
The GDP figure is the last major piece of data before the Bank of Canada announces its interest rate decision Sept. 3.
BOND PRICES RISE
Canadian bond prices rose ahead of the GDP data.
"The predominant view is that the economy is going to deteriorate significantly in the coming couple of quarters and so bonds should do reasonably well with increased demand for safe assets," said Carlos Leitao, chief economist at Laurentian Bank of Canada.
Domestic data on Thursday showed that high prices for energy exports boosted Canada's current account surplus in the second quarter to C$6.76 billion ($6.44 billion) from C$4.46 billion in the first quarter. [See [ID;nN28257696]
The two-year bond added 5 Canadian cents to C$100.04 to yield 2.733 percent. The 10-year rose 18 Canadian cents to C$106.10 to yield 3.505 percent.
The yield spread between the two-year and 10-year bond was 83.9 basis points, up from 80.4 at the previous close.
The 30-year bond gained 21 Canadian cents to C$117.01 for a yield of 3.999 percent. In the United States, the 30-year treasury yielded 4.381 percent.
The three-month when-issued T-bill yielded 2.44 percent, down from 2.45 percent at the previous close.
(Reporting by John McCrank; Editing by Ted Kerr)
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