December 11, 2012 / 1:22 PM / 6 years ago

Canadian dollar firms to seven-week high after Canada trade deficit shrinks

TORONTO (Reuters) - Canada’s currency was steady on Tuesday after briefly touching its strongest level in nearly two months against the U.S. dollar following data that showed Canada’s trade deficit unexpectedly shrank in October.

A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011. REUTERS/Mark Blinch

Canada posted a trade deficit of C$169 million ($171 million) in October from a revised C$1.01 billion deficit in September as imports fell 1.2 percent while higher prices and volumes drove up exports by 1.0 percent. Analysts had expected a shortfall of C$1.2 billion.

“It’s indicating a possible bounce back in growth, that’s probably supporting the Canadian dollar,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“It’s better than expected so (the Canadian dollar) will provide a little bit of lift, but I think the impact could be fairly short-lived until we get further confirmation of indications of growth bouncing back here in Canada for the final quarter of this year.”

The data was in contrast to U.S. trade data, which showed its deficit widened in October. Exports suffered their biggest drop in nearly four years, indicating slowing global demand was spilling over into the already struggling U.S. economy.

At 9:54 a.m. (1454 GMT), the Canadian dollar stood at C$0.9868 versus its U.S. counterpart, or $1.0134, little changed from Monday’s session close at C$0.9870, or $1.0132.

The currency touched a session high after the Canadian trade data release. It hit C$0.9858, or $1.0144, its strongest level since October 19, but was still stuck in a narrow range of between $0.9858 to $0.9880.

It underperformed against other major currencies against a broadly weaker greenback, including the euro after better-than-expected German investor sentiment data.

“As the euro has rallied, you’ve seen some weakness not only in the U.S. dollar but in the Canadian dollar against the crosses,” said Matt Perrier, director of foreign exchange sales at BMO Capital Markets.

The other main focus for investors was a meeting of the Federal Reserve and “fiscal cliff” talks in the United States to avoid $600 billion of previously drawn-up spending cuts and tax hikes set to begin in the new year.

When the Fed concludes its meeting on Wednesday, the central bank is expected to extend its asset-purchase scheme and commit to buy $45 billion of U.S. debt each month.

A close higher on Tuesday would mark the sixth straight daily advance for the currency after the Canadian government’s approval of two big takeovers and a hawkish sounding central bank boosted confidence over the past week.

Perrier pointed to U.S. dollar support around C$0.9845, followed by C$0.9815-20.

He noted resistance in the C$0.9910-20 area. “You’d probably see some of the more recent entrants into the short dollar/Canada trade probably feel a little bit of pain on a move through there,” Perrier added.

Canadian bond prices eased across the curve as global stock markets advanced, buoyed by the pick-up in German confidence and expectations the Federal Reserve will keep pumping money into the U.S. economy. <US/>

Canada’s two-year bond lost 3 Canadian cents to yield 1.073 percent, and the benchmark 10-year bond gave back 16 Canadian cents to yield 1.718 percent.

Additional reporting by Claire Sibonney; Editing by Kenneth Barry and W Simon

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