CANADA FX DEBT-C$ falls after GDP data disappoints market
* C$ touches low of 94.37 U.S. cents
* Canada April GDP weaker than expectations
* Bonds higher as July rate hike questioned (Adds details, quotes)
By Jennifer Kwan
TORONTO, June 30 (Reuters) - The Canadian dollar slid on Wednesday after data showed the nation's economy stalled unexpectedly in April, making the market more dovish on the speed at which it expects the Bank of Canada to raise interest rates.
Currencies usually strengthen as interest rates rise as higher rates attract capital flows.
The Canadian dollar CAD=D4 touched a low of C$1.0597 to the U.S. dollar, or 94.37 U.S. cents, after government data showed real gross domestic product was flat in the month after seven straight months of expansion, disappointing market expectations for 0.2 percent growth. [ID:nN30434455]
"It was a bit of a shock for the markets to see growth as soft as it was," said Shaun Osborne, chief currency strategist at TD Securities.
"I don't think it's a significant blow to second quarter prospects overall at the moment, but probably means that growth is a little bit weaker than maybe the (Bank of Canada) had expected."
At 10:08 a.m. (1408 GMT), Canada's dollar was at C$1.0580 to the U.S. dollar, or 94.52 U.S. cents, down from Tuesday's finish at C$1.0553 to the U.S. dollar, or 94.76 U.S. cents.
Osborne said the outlook for the Canadian dollar is weaker and that it could easily fall to C$1.12 to C$1.15 to the U.S. dollar.
"The risk reward suggests to us that there's a lot less upside in the Canadian dollar relatively to the downside potential from here so we favor buying U.S. dollars and selling Canada," he said.
The currency switched tracks after the GDP data. Earlier in the day, it rose on firmer oil prices and on a rebound in global equity markets as jitters about bank funding in the euro zone eased. [ID:nLDE65T0VB]
JULY RATE HIKE QUESTIONED
Increasing nervousness about the fragility of the economic recovery has seen a sharp turnaround in interest rate hike expectations.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key interest rate, now point to a less than 50 percent chance that the bank will raise rates on its July 20 policy announcement day. As of late Tuesday, the probability was at 60 percent. BOCWATCH
Bond prices typically fall when rates are on the rise as their fixed payments look less attractive in comparison with the rising yields on other short-term investments.
"It's not unreasonable to have a bit of a question mark against the amount of tightening the bank can introduce because they've said themselves they are going to be quite sensitive to the global economic environment, and nothing is written in stone," Osborne said.
Canadian government bond prices were slightly higher Wednesday. The two-year government bond CA2YT=RR climbed 11 Canadian cents to yield 1.345 percent, while the 10-year bond CA10YT=RR was up 12 Canadian cents to yield 3.078 percent. (Reporting by Jennifer Kwan; editing by Peter Galloway)
© Thomson Reuters 2017 All rights reserved.