Canadian dollar slides to five-week low as rate hike odds dwindle on trade data

TORONTO (Reuters) - The Canadian dollar retreated to a five-week low against the U.S. dollar on Thursday after domestic data showing a drop in exports for the third straight month further weakened prospects the Bank of Canada would increase interest rates again this year.

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/File Photo

Canada’s trade deficit widened in August to C$3.41 billion from a revised C$2.98 billion shortfall in July, as exports fell for a third consecutive month, Statistics Canada said.

“Canadian trade in August was very weak, there’s no glossing over it,” said Adam Button, currency analyst at ForexLive.

“The Canadian dollar fell more than usual because the market sees soft trade in August as a sign that Canadian exporters are struggling due to the strong loonie. The market is extrapolating soft trade going forward.”

At 4:00 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2571 to the greenback, or 79.55 U.S. cents, down 0.8 percent.

The currency’s strongest level of the session was C$1.2463, while it touched its weakest since Aug. 31 at C$1.2585.

Button said the market is also nervous about domestic employment data for September due on Friday. “The market has lost faith in an October rate hike, and a weak job report would be the nail in the coffin,” he added.

The central bank has raised rates twice since July. But the chances of another hike this year dropped to 60 percent from 66 percent before the data, the overnight index swaps market indicated. They were nearly 100 percent before Governor Stephen Poloz signaled last week that a third hike was not imminent. BOCWATCH

The Canadian dollar’s one-cent slide came even as the price of oil, a major Canadian export, rallied some 2 percent on expectations that Saudi Arabia and Russia would extend production cuts.

U.S. crude CLc1 futures settled at $50.79 a barrel, up 1.62 percent.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 2 Canadian cents to yield 1.523 percent and the 10-year CA10YT=RR rising 15 Canadian cents to yield 2.103 percent.

The gap between Canada’s two-year yield and its U.S. equivalent narrowed by 1.9 basis points to a spread of 3.2 basis points.

Reporting by Fergal Smith and Solarina Ho; Editing by Bill Trott and Diane Craft