July 31, 2008 / 9:13 PM / 9 years ago

Canadian dollar clipped by stumbling economy

TORONTO (Reuters) - The Canadian dollar closed lower against the U.S. dollar for the sixth time in the past seven days on Thursday as a report showed Canada’s economy unexpectedly shrank in May, dashing hopes the Bank of Canada will raise interest rates any time soon.

Canadian bond prices rose across the curve on the weak economic data, as well as some softer-than expected U.S. data.

The Canadian currency closed at C$1.0240 to the U.S. dollar, or 97.66 U.S. cents, down from C$1.0228 to the U.S. dollar, or 97.77 U.S. cents, at Wednesday’s close.

The currency hit a low of C$1.0270 after a report from Statistics Canada showed the economy shrank by 0.1 percent in May from April, missing expectations of a 0.2 percent rise.

“The market was disappointed with the decline in May GDP,” said Paul Ferley, assistant chief economist at RBC Capital Markets. “But it did follow a solid gain in April, four-tenths of a percent, and with that earlier increase it hopefully will return quarterly growth back to the positive column.”

Canada’s economy unexpectedly shrank in the first quarter for the first time in five years. Two back to back negative quarters would mean that Canada is technically in a recession. The negative print on the May GDP quashed any hopes of the Bank of Canada raising interest rates any time soon, despite higher inflation, analysts said.

Adding to the pressure on the currency was weak U.S. data that did not bode well for a Canadian economy that relies heavily on the United States as a market for the bulk of its exports.

A report from the United States showed the number of workers filing claims for new jobless benefits rose more than expected last week, while other data showed the U.S. economy grew slightly less than expected in the second quarter.

The performance of the Canadian dollar going forward will depend on how the U.S. dollar fares, with the next key event being the U.S. nonfarms payroll report on Friday, said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“There’s no data in Canada, other than this morning’s GDP, which was, of course a disappointment, so Canada will trade off the back of the greater flows of the U.S. dollar,” he said.

Spitz said the Canadian dollar could be set to break out of the range it’s been in for the past eight months or so, hovering on either side of parity with the greenback, especially if it weakens below its 2008 low point of C$1.0380, hit January 22.

The Canadian dollar has declined in six of the past seven sessions, with the lone gain only a fraction of a cent, as economic concerns dominate.

Some of those concerns could be offset by Canada-friendly financial flows, such as recent takeovers of Canadian companies by foreign interests, which will have to convert the cash for the deals to Canadian dollars when the deals go through.

The latest deal was announced Thursday, with Philip Morris International Inc (PM.N) offering C$30 a share cash to take over Rothmans Inc ROC.TO, Canada’s No 2 cigarette maker, valuing Rothmans at about C$2 billion.

BOND PRICES RALLY

Canadian bond prices finished higher across the curve due to the weak economic data, which upped the demand for more secure assets, said RBC’s Ferley.

He said a lot of attention would be focused on the U.S. jobs report on Friday, especially after the just-released U.S. weekly jobless claims numbers, which rose more than expected.

The two-year bond was up 21 Canadian cents at C$101.42 to yield 2.941 percent. The 10-year bond rose 96 Canadian cents to C$104.48 to yield 3.701 percent.

The yield spread between the two-year and 10-year bond was 86.1 basis points, up from 75.3 basis points.

The 30-year bond jumped C$1.35 to C$115.20 for a yield of 4.096 percent. In the United States, the 30-year treasury yielded 4.581 percent.

The three-month when-issued T-bill yielded 2.44 percent, down from 2.46 percent at the previous close.

Editing by Peter Galloway

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