TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday as a drop in oil prices offset data showing strength in the domestic economy.
Canada's gross domestic product grew at an annualized 3.7 percent pace, slightly below economists' expectations for 3.9 percent, although growth in both the third and fourth quarters of 2016 was revised upward.
The economy also appeared to have solid momentum heading into the second quarter, with growth rising by a better-than-expected 0.5 percent in March.
"If we continue to get growth numbers like this ... it's going to be tougher for the Bank of Canada to avoid rate hikes at some point in the distance," said Derek Holt, head of capital markets economics at Scotiabank.
The central bank last week kept interest rates on hold at 0.5 percent, but struck a more upbeat tone than investors had expected.
Chances of a Bank of Canada rate hike this year have increased to 30 percent from roughly 1-in-10 before the interest rate decision, data from the overnight index swaps market showed. BOCWATCH
U.S. crude oil futures CLc1 settled 2.7 percent lower at C$48.32 a barrel despite Organization of the Petroleum Exporting Countries-led output cuts to reduce a global glut. Output from OPEC rose in May, the first monthly increase this year, a Reuters survey found. [O/R]
Oil is one of Canada's major exports. Weakening in the commodity could push speculators to add to bearish bets on the Canadian dollar, said Hendrix Vachon, senior economist at Desjardins.
Speculators increased net short positions in the Canadian dollar to a record high as of May 23, recent data from the Commodity Futures Trading Commission and Reuters calculations showed.
At 4 p.m. (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3507 to the greenback, or 74.04 U.S. cents, down 0.4 percent.
The currency's strongest level of the session was C$1.3438, while it touched its weakest since May 24 at C$1.3523.
Still, the loonie rose 1.1 percent for the month. Canadian government bond prices were mixed across the yield curve, with the two-year CA2YT=RR up 1 Canadian cent to yield 0.695 percent and the 10-year CA10YT=RR falling 1 Canadian cent to yield 1.416 percent.
The 10-year yield touched its lowest intraday since Nov. 10 at 1.398 percent.
Canada's trade data for April is due on Friday. ECONCA
Additional reporting by Alastair Sharp; Editing by Meredith Mazzilli and Peter Cooney