May 31, 2018 / 8:13 PM / 2 years ago

CANADA FX DEBT-C$ slides as economy slows, U.S. moves on tariffs

 (Adds strategist quotes, details on activity; updates prices)
    * Canadian dollar at C$1.2960, or 77.16 U.S. cents
    * Loonie touches a more than one-week high at C$1.2819
    * U.S. oil price falls 1.7 percent
    * Bond prices higher across the yield curve

    By Fergal Smith
    TORONTO, May 31 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Thursday, reversing much of its
gains from the day before, after data showed
weaker-than-expected growth in the domestic economy and U.S.
tariffs dented prospects for NAFTA trade pact talks.
    At 3:44 p.m. EDT (1944 GMT), the Canadian dollar         
was trading 0.7 percent lower at C$1.2960 to the greenback, or
77.16 U.S. cents.
    The currency's weakest level of the session was C$1.2990,
while it touched its strongest intraday since May 23 at
    The United States on Thursday said it will impose tariffs on
aluminum and steel imports from Canada, Mexico and the European
Union, reigniting investor fears of a global trade war as
Washington's allies took steps to retaliate against U.S. goods.
    U.S. President Donald Trump announced the tariffs in March
as part of an effort to protect U.S. industry and workers from
what he described as unfair international competition, a key
theme of his "America First" agenda.
    Canadian Foreign Minister Chrystia Freeland said Ottawa will
impose retaliatory tariffs on C$16.6 billion worth of U.S.
exports and challenge U.S. steel and aluminum tariffs under the
North American Free Trade Agreement as well as at the World
Trade Organization.             
    "Trump is willing to take short-term blows in order to
negotiate more aggressive trade deals," said Christian Lawrence,
senior market strategist at Rabobank. "This doesn't bode well
for NAFTA negotiations."
    Canada sends about 75 percent of its exports to the United
States so its economy could be hurt if NAFTA is scrapped.
    An uncertain trade outlook has been one source of worry for
the Bank of Canada. But chances of a Canadian interest rate hike
as soon as July were boosted on Wednesday by a more hawkish than
expected policy statement from the central bank           .
    While uncertainty can come from many sources, monetary
policy decisions must always be forward looking, BoC Deputy
Governor Sylvain Leduc said on Thursday, reiterating that the
central bank expects higher interest rates will be needed to
keep inflation near its target.             
    Still, Canada's economy grew at its slowest pace in nearly
two years in the first quarter amid cooler exports and a weaker
housing sector, Statistics Canada said.             
    Gross domestic product grew in the first three months of
2018 at an annualized rate of 1.3 percent, short of expectations
for 1.8 percent.
    U.S. crude oil futures        settled 1.7 percent lower at
C$67.04 a barrel despite a larger-than-expected decline in
inventories. Oil is one of Canada's major exports.      
    Canadian government bond prices were higher across the yield
curve. The 10-year             rose 33 Canadian cents to yield
2.228 percent.

 (Reporting by Fergal Smith, editing by G Crosse)
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