Canadian dollar weakens to one-week low on data, losses pared as oil rises

TORONTO (Reuters) - The Canadian dollar weakened to a one-week low against its U.S. counterpart on Tuesday after disappointing Canadian trade data and as risk appetite deteriorated, although losses were pared as oil prices turned higher.

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

Canada’s trade deficit unexpectedly jumped to C$1.91 billion ($1.45 billion) in February from C$628 million in January as exports slumped by their most in nearly seven years.

“It suggests to me that the momentum that we seemed to have at the turn of the year in the economy is again going to be a false dawn,” said HSBC Bank Canada Chief Economist David Watt.

The implied probability of a Bank of Canada rate cut this year rose to 24 percent from 17 percent before the data. It had been above 50 percent a little more than one month ago. BOCWATCH

The data fed anxiety that the near 12 percent rebound in the Canadian dollar from a 12-year low in January at C$1.4689 will hinder rebalancing of Canada’s economy toward non-energy exports.

“Not cause for panic yet, but I think some concern which may be echoed by the Bank of Canada next week,” said Scott Smith, senior market analyst at Cambridge Global Payments.

The risk-sensitive, commodity-driven currency had already weakened before the trade data as investors sought refuge in safe-haven assets such as the Japanese yen and gold.

However, U.S. crude CLc1 prices settled at $35.89 a barrel, up 0.5 percent, after Kuwait said an output freeze by major oil producers would proceed without Iran.

The Canadian dollar CAD=D4 ended at C$1.3157 to the greenback, or 76.01 U.S. cents, weaker than Monday's close of C$1.3072, or 76.50 U.S. cents.

The currency’s strongest level of the session was C$1.3069, while it touched its weakest since March 28 at C$1.3219.

Meanwhile, China’s transition to a more sustainable pace of growth is welcome, but it will take time and could be marked by periods of economic and financial volatility, Bank of Canada Senior Deputy Governor Carolyn Wilkins said.

Canadian government bond prices were higher across the maturity curve, with the two-year CA2YT=RR price up 5 Canadian cents to yield 0.52 percent and the benchmark 10-year CA10YT=RR rising 52 Canadian cents to yield 1.167 percent.

The 10-year yield touched its lowest since Feb. 29 at 1.157 percent.

The curve flattened in sympathy with U.S. Treasuries, as the spread between the 2-year and 10-year yields narrowed by 3.3 basis points to 64.7 basis points, indicating outperformance for longer-dated maturities.

Reporting by Fergal Smith; Editing by Lisa Von Ahn and Chris Reese