January 31, 2012 / 3:48 PM / 6 years ago

Canadian dollar softens on sluggish GDP data

TORONTO (Reuters) - The Canadian dollar gave back most of its early gains against the U.S. currency on Tuesday morning after data showed Canada’s economy unexpectedly contracted in November for the first time since May, offsetting the overnight boost the currency got from an agreement on a new European pact to tackle the euro-zone debt crisis.

The Canadian dollar rose as high as C$0.9966 against the greenback, but pared some of its gains after Statistics Canada said Canadian real gross domestic product fell 0.1 percent in November. Economists had forecast an increase of 0.2 percent.

The weak data was not expected to alter Bank of Canada monetary policy in the near term but left the market deflated.

“The number was definitely a bit softer than expected, but in terms of policy implications we know the bank’s on hold here for some time,” said Shaun Osborne, chief currency strategist at TD Securities. “We’d need to see more data to even raise the prospect of rate cuts in Canada in the future.”

At 10:10 a.m. (1510 GMT), Canada’s dollar was at C$1.001 to the U.S., or 99.90 U.S. cents, after finishing Monday at C$1.0028 to the U.S., or 99.72 U.S. cents.

The currency’s early highs were reached after the European Union agreed on Monday on a deal that sets strict new measures on sovereign budget discipline, and which is intended to prevent a repeat of the massive overspending that spurred the debt crisis.

Markets rallied early around the news with commodity prices broadly up.

The mood was further lifted after Greek Prime Minister Lucas Papademos said negotiators had made “significant progress” towards a debt swap deal and a second round of cheap loans by the European Central Bank was set to hit liquidity-starved euro zone banks next month.

There was a chance the Canadian currency could push higher on the day as investors were expected to unload more U.S. funds before the end of the month, which Osborne said “could push us back towards the C$0.9950 area”.

Canadian government bond prices were mostly higher with the two-year bond up a Canadian cent to yield 0.980 percent. The 10-year bond rose 15 Canadian cents to yield 1.921 percent.

Reporting By Jon Cook; Editing by Peter Galloway

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