January 6, 2014 / 9:45 PM / 4 years ago

C$ weakens on China data, but holds recent range

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Canadian pennies are arranged in this photo illustration in Toronto, Ontario, March 30, 2012.Michael Fiala

TORONTO (Reuters) - The Canadian dollar weakened modestly against the greenback on Monday, reacting to figures that showed growth in China's service sector slowed sharply last month, though the currency stuck to its recent range ahead of some key data releases later in the week.

Trading activity was back to normal for the first time this year after some choppy sessions in lighter volume during the Christmas and New Year's holiday weeks.

Data showed service sector activity picked up across most of Europe, but China did not fare as well, with the index there falling to a two-year low. Because China is a major consumer of commodities, the Canadian dollar can be sensitive to economic developments in the world's second-largest economy.

As well, domestic data showed Canadian producer prices edged up in November, as expected, though raw materials prices dropped, mainly due to crude energy products.

"As a leading indicator of consumer inflation, the continued softness in raw materials prices doesn't bode well for CPI and consumer prices, which obviously the Bank of Canada has a pretty keen eye on right now," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

The Canadian dollar ended the North American session at C$1.0652 to the greenback, or 93.88 U.S. cents, weaker than Friday's close of C$1.0639, or 93.99 U.S. cents.

"We've been playing a range from C$1.0580 to C$1.0735 for the last little bit, I don't expect us to get too much outside of that range in the near future," said John Curran, senior vice president at CanadianForex in Toronto.

Curran said the Canadian dollar could get direction from economic data later in the week, which includes unemployment reports for both Canada and the United States, as well as the minutes from the U.S. Federal Reserve's policy-setting meeting in December.

The Fed decided at that meeting to start reducing the amount of bonds it buys to boost the economy, a move that caught some in the markets off guard. Investors will parse the minutes for further clarity on how quickly the central bank could wind down the program.

The gradual decrease in the Fed's bond buying, as well as a more dovish Bank of Canada are both factors that are expected to weigh on the Canadian dollar this year.

Over the weekend, Finance Minister Jim Flaherty said Bank of Canada Governor Stephen Poloz had told him and provincial finance ministers in a recent meeting the currency could see some weakness.

Canadian government bond prices were higher across the maturity curve, with the two-year up half a Canadian cent to yield 1.134 percent. The benchmark 10-year was up 30 Canadian cents to yield 2.717 percent.

Editing by Peter Galloway

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