September 29, 2017 / 2:51 PM / in 2 months

Canadian dollar weakens as prospects dim on rate hike

TORONTO (Reuters) - The Canadian dollar weakened against the greenback on Friday after domestic data showed the economy stalled in July, further dampening prospects of a another interest rate hike by the Bank of Canada next month.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Speculators have raised bullish bets on the loonie to the highest since November 2012, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of Sept. 26, Canadian dollar net long positions had climbed to 74,605 contracts from 58,846 a week earlier.

“I think those longs are wrong, and they’re going to be caught wrong, and that’s one of the reasons why maybe we’ve seen USD/CAD spike up so much this week,” said Amo Sahota, director at Klarity FX in San Francisco.

Canada’s economy was unchanged in July following eight consecutive months of growth, including a 0.3 percent increase in June, Statistics Canada said.

“We think that’s going to be echoed through the balance of Q3,” said Sahota, adding that he was glad to see the Bank of Canada ease up on its “hawkish rhetoric”.

The economic data did not justify a 10 percent rally by the loonie, he said.

The central bank raised rates in July and September after the country’s growth accelerated in the first half of the year, but a speech by Bank of Canada Governor Stephen Poloz and Deputy Governor Tim Lane have helped talk down the Canadian dollar in recent weeks after the currency’s strength put growth at risk.

Chances of another increase next month edged lower after Friday’s data, to around 20 percent, the overnight index swaps market indicated.

At 4:00 p.m. EDT, the Canadian dollar was down 0.4 percent at C$1.2478 to the greenback, or 80.14 U.S. cents. The loonie has weakened 3 percent since its peak this month.

The currency traded in a range between $1.2417 and C$1.2531. On Thursday it touched a four-week low at C$1.2519.

Canadian government bond prices were higher across the yield curve, with the two-year price up 4.5 Canadian cents to yield 1.518 percent and the benchmark 10-year rising 27 Canadian cents to yield 2.097 percent.

The gap between the two-year yield and its U.S. equivalent narrowed by 6 basis points to a spread of 2.7 basis points. Earlier this month the spread reached its widest since January 2015 at 24.8 basis points.

Reporting by Fergal Smith and Solarina Ho; Editing by David Gregorio

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