August 1, 2008 / 3:02 AM / 9 years ago

Canadian dollar slumps on rate cut expectations

TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Friday, its eighth decline in the past nine sessions, after recent data pointed to a stumbling economy and the market anticipated the next move the Bank of Canada will make on interest rates will be a cut.

Bond prices rallied on a safety bid as stock markets weakened, and were given an extra boost by the interest rate outlook.

The Canadian currency closed at C$1.0271 to the U.S. dollar, or 97.36 U.S. cents, down from C$1.0240 to the U.S. dollar, or 97.66 U.S. cents, at Thursday’s close.

The currency hit a session low of C$1.0299, its weakest point since June 16. For the week, it ended down 0.7 percent.

The Canadian economy has been hard hit by the slowdown in the United States, where it sends over three-quarters of its exports. American consumers have been struggling under the weight of a housing slump and tight credit.

The Canadian economy shrank an annualized 0.3 percent in the first quarter, and data on Thursday showed it continued to founder in June, declining by 0.1 percent.

“The Canadian dollar remains under pressure and I think it’s in large part due to the soft run of Canadian data, particularly the GDP data, and the growth outlook for Canada is softening,” said Fergal Smith, managing market strategist at Action Economics.

The softening outlook for Canadian growth has led investors to start pricing in an interest rate cut by the Bank of Canada before the end of the year, Smith said. Until recently, rising inflation had investors betting the next move by the Bank of Canada would be a hike.

Smith said that if the Canadian dollar breaks above C$1.0325 to the U.S. dollar, momentum would likely carry it past C$1.0380, the currency’s weakest point so far this year, hit on January 22.

It is a holiday in most of Canada on Monday.

BOND PRICES RALLY

Canadian bond prices rallied on weak performances in the North American stock markets, which upped the safety bid for government debt, and were given an extra boost by the interest rate outlook.

“Yesterday’s GDP news is continuing to filter through, in that the market is believing there are greater odds of the Bank of Canada cutting rates before year-end and it’s going to town with it,” said Michael Gregory, senior economist at BMO Capital Markets.

The two-year bond rose 11 Canadian cents to C$101.53 to yield 2.878 percent. The 10-year bond climbed 40 Canadian cents to C$104.85 to yield 3.657 percent.

The yield spread between the two-year and 10-year bond was 92.4 basis points, up from 86.1 basis points.

The 30-year bond added 51 Canadian cents to C$115.71 for a yield of 4.069 percent. In the United States, the 30-year treasury yielded 4.569 percent.

The three-month when-issued T-bill yielded 2.42 percent, down from 2.44 percent at the previous close.

Editing by Peter Galloway

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