Canada dollar falls on faltering economy, bonds up
* Canadian dollar slides 0.4 percent on weak GDP report
* Economy shrinks for first time in five years
* Bonds rally on prospect of another rate cut
By John McCrank
TORONTO, May 30 (Reuters) - The Canadian dollar fell 0.4 percent against its U.S. counterpart on Friday after data showed the economy contracted in the most recent quarter for the first time in five years, all but confirming the Bank of Canada will cut its key lending rate in June.
Domestic bond prices rose on the unexpectedly soft gross domestic product report.
The Canadian dollar closed at US$1.0070, valuing a U.S. dollar at 99.30 Canadian cents, down from US$1.0110, or 98.91 Canadian cents, at Thursday's close.
For the week, the currency ended down 0.5 percent.
"We are closing a bit on the soft side compared to where we've been trading this week, but I think, all things considered, Canada hung in there pretty well given how weak the data was this morning," said Steve Butler, senior currency strategist at Scotia Capital.
Canada's GDP fell an annualized 0.3 percent in the first quarter, mostly due to a steep decline in inventories, driven by weakness in the auto sector, according to the report from Statistics Canada.
Analysts surveyed by Reuters had, on average, expected annualized first-quarter real growth of 0.3 percent.
While the momentum heading into the second quarter is not exactly robust, Butler said he does not think the economy will tilt into recession.
"I think the Bank of Canada has been cutting rates and I think that will eventually spill through, so I don't see the 'R word' creeping into our vocabulary," he said.
Finance Minister Jim Flaherty also said he thinks the economy will rebound.
"If some people are saying that (Canada is headed for a recession) I disagree with them," Flaherty told reporters in Montreal. "I think, quite frankly, that the economic fundamentals, as I have said, are quite strong."
That being said, the Bank of Canada is now much more likely to cut interest rates by another 25 basis points when it meets in June, Butler said.
The central bank has cut its key lending rate by 150 basis points since December, to 3.00 percent, to spur domestic growth amid the downturn in the United States.
BOND PRICES RISE
Bond prices rose on the prospect of lower interest rates.
"That GDP data has really lit a fire under bondholders," said Eric Lascelles, chief economics and rates specialist at TD Securities.
"As much as it was entirely conceivable, and a small figure was entirely expected, the negative outcome has been pretty shocking. It has caused some to call for a 50 basis point cut by the Bank of Canada," Lascelles said, adding that he thinks the central bank will cut by 25 basis points.
The two-year bond rose 29 Canadian cents to C$101.43 to yield 3.006 percent. The 10-year bond climbed 9 Canadian cents to C$102.22 to yield 3.707 percent.
The yield spread between the two- and 10-year bond was 70.4 basis points, up from 61.3 at the previous close.
The 30-year bond gained 20 Canadian cents to C$114.55 for a yield of 4.134 percent. In the United States, the 30-year treasury yielded 4.714 percent.
The three-month when-issued T-bill yielded 2.68 percent, down from 2.70 percent at the previous close. (Reporting by John McCrank; editing by Rob Wilson)
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