October 31, 2012 / 9:18 PM / 5 years ago

Canadian dollar ends near flat after GDP data shows contraction

3 Min Read

TORONTO (Reuters) - The Canadian dollar weakened below parity against the U.S. currency before clawing back to end little changed on Wednesday after data showed the Canadian economy contracted unexpectedly in August.

The currency weakened to a session low shortly after the gross domestic product data pointed to slower growth in the third quarter and supported the Bank of Canada's message that interest rate hikes are not imminent. It later pared those losses.

"We are pretty much ending unchanged from where we started the day, but we saw a 50-point range and that's the largest we've seen in a week," said Dave Bradley, director of foreign exchange trading at Scotiabank.

The Canadian dollar ended the North American session at C$0.9990 to the greenback, or $1.0010, compared with C$0.9993, or $1.0007, at Tuesday's close.

Bradley said the market was still suffering from poor liquidity due to the absence of many U.S. traders recovering from monster storm Sandy.

"Despite the U.S. equity markets opening again, a lot of New York based participants are out of the market ... I think liquidity and general flow is at a minimum," Bradley said.

With October 31 marking the end of the financial reporting year for Canadian banks, Bradley noted the Canadian currency was virtually unchanged from a year ago within a few basis points of parity.

Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada, said the currency could be weighed down by the August GDP numbers, which showed a 0.1 percent contraction, through to the end of the week.

"It'll linger for a little bit, the only thing that could change the tune on this is we have payrolls," he said.

Canada and the United States are set to release monthly employment data on Friday.

U.S. equity markets were mostly flat on Wednesday, opening for the first time this week after shutting their doors ahead of Hurricane Sandy. .N

With the GDP data backing up recent Bank of Canada comments that rate rises are "less imminent", the price of Canadian government debt turned positive after the data, especially at the front end of the curve, and outperformed U.S. Treasuries.

The two-year bond was up 5 Canadian cents to yield 1.076 percent, while the benchmark 10-year bond rose 20 Canadian cents to yield 1.788 percent.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders pulled their bets on the possibility of a rate hike in late 2013.

With additional reporting by Alastair Sharp; Editing by Jeffrey Hodgson and Chizu Nomiyama

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