October 31, 2017 / 9:02 PM / in 3 years

CANADA FX DEBT-C$ weakens as GDP data supports Bank of Canada's caution

 (Adds analyst quote, details throughout; updates prices)
    * Canadian dollar at C$1.2900, or 77.52 U.S. cents
    * Domestic GDP falls 0.1 percent in August
    * Bond prices higher across the yield curve
    * Canada-U.S. 2-year spread reaches widest since July 11

    By Fergal Smith
    TORONTO, Oct 31 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Tuesday after data showing a
surprise contraction of the domestic economy supported the Bank
of Canada's caution on further interest rate hikes.
    Canada's gross domestic product declined 0.1 percent in
August following flat growth in July, in part due to maintenance
shutdowns in major industries. Analysts had forecast an increase
of 0.1 percent.                 
    "Any piece of data that would confirm the Bank of Canada's
caution would have an outsized effect on the currency," said
Eric Theoret, currency strategist at Scotiabank. "The Canadian
dollar was vulnerable."
    Canada is at a "crucial" spot in the economic cycle with
significant uncertainties clouding the way forward, Bank of
Canada Governor Stephen Poloz said.             
    The central bank, which hiked rates in July and September
for the first time in nearly seven years, left its benchmark
rate unchanged at 1 percent last week.
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading at C$1.2900 to the greenback, or 77.52 U.S. cents, down
0.5 percent.
    The currency traded in a range of C$1.2825 to C$1.2915. On
Friday, it touched its weakest in more than three months at
    In separate domestic data, producer prices fell by 0.3
percent in September from August as a stronger Canadian dollar
helped cut prices for motorized and recreational vehicles.
    Canada's October employment report and trade data for
September are due on Friday. The U.S. Federal Reserve will make
an interest rate decision on Wednesday.
    Prices of oil, one of Canada's major exports, added to
recent gains. U.S. crude        prices settled up 0.4 percent at
C$$54.38 a barrel.      
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 2.5 Canadian cents to
yield 1.393 percent and the 10-year             rising 6
Canadian cents to yield 1.951 percent.
    Canadian yields fell further below yields on U.S. Treasuries
across much of the curve.
    The gap between Canada's two-year yield and its U.S.
counterpart widened by 3.2 basis points to a spread of -20.7
basis points, its widest since July 11.

 (Reporting by Fergal Smith, editing by G Crosse)
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