January 30, 2009 / 10:10 PM / 9 years ago

CANADA FX DEBT-C$ weighed down by weak domestic GDP report

* C$ hits one-week low after weak GDP data

* Currency stages late rebound as oil prices rise

* Bond prices finish mixed, supply concerns remain

By Frank Pingue

TORONTO, Jan 30 (Reuters) - The Canadian dollar fell versus the U.S. dollar on Friday, after data showed Canada’s economy shrank more than expected in November, reinforcing expectations of another interest rate cut in March.

The Statistics Canada report showed the economy shrank 0.7 percent in November, the biggest monthly drop in over five years, which rattled the currency early in the session. Despite an afternoon rally, it was never able to fully recover.

The Canadian dollar closed at C$1.2265 to the U.S. dollar, or 81.53 U.S. cents, down from Thursday’s close of C$1.2233 to the U.S. dollar, or 81.75 U.S. cents.

While still lower, it managed to finish comfortably above the one week low of C$1.2425 to the U.S. dollar or 80.48 U.S. cents, that it touched moments after the GDP report.

“A report like that reinforces expectations for the Bank of Canada to cut on March 3, and we’re sticking to our call that they cut 50 basis points and leave their rate on hold for a long time,” said Derek Holt, an economist at Scotia Capital.

“It takes some of the wind out of the Canadian dollar flows and at the same time with the global picture deteriorating at a quicker than expected pace, that‘s, going to keep commodities down ... and that too would work against the Canadian dollar.”

The Bank of Canada has already lowered its key overnight rate by 350 basis points since December 2007 to 1.00 percent, but many experts anticipate further easing will be needed to help lift the economy out of recession.

A key factor behind the currency’s late-session bounce was the rise in prices for oil, a key Canadian export, after OPEC signaled it may deepen record output cuts.

For the week, the Canadian dollar fell 0.4 percent.

Next week, moves in the currency will likely be determined by shifts in commodity prices and domestic economic data, most notably the January unemployment report due on Friday.

BONDS MIXED

Canadian bond prices ended mixed with gains coming on the long end of the curve alongside the rally in the bigger U.S. Treasury market after a report there showed the U.S. economy shrank at its fastest pace in nearly 27 years.

But the retreat was not as deep as analysts had expected.

“Initial optimism from the (U.S.) report quickly dissipated as expectations started to build that the unexpected strength we saw in Q4 would likely get reversed in Q1,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

But nagging concerns over swelling supply tied to deficits in both Canada and the United States, pressured bond prices on the short end of the curve.

The two-year bond fell 4 Canadian cents to C$102.39 to yield 1.421 percent, while the 10-year bond climbed 17 Canadian cents to C$109.57 to yield 3.062 percent.

The 30-year bond rose 80 Canadian cents to C$121.30 to yield 3.770 percent. In the United States, the 30-year treasury yielded 3.602. (Editing by Rob Wilson)

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