* Slide in oil price primary source of weakness
* Bearish economic reports also hit currency
* Market focus on Friday’s trade, employment data (Updates to close)
By Ka Yan Ng
TORONTO, March 11 (Reuters) - The Canadian dollar closed slightly lower against the U.S. currency on Wednesday, erasing early gains, hurt by weaker oil prices and reports that predicted the economy is still in for a rough ride.
The currency finished at C$1.2862 to the U.S. dollar, or 77.75 U.S. cents, down from C$1.2852 to the U.S. dollar, or 77.81 U.S. cents, at Tuesday’s close.
Early in the session the currency rallied as high as C$1.2751 as growing risk appetite resulted in a range of currencies strengthening against the greenback, which is typically viewed as a safe haven.
But the Canadian unit then dropped low as C$1.2904 to the U.S. dollar, or 77.50 U.S. cents, as oil, a major Canadian export, fell more than 6 percent to below $43. [ID:nSP383602]
“The fact that we’ve seen oil prices softening today is contributing (to the Canadian dollar’s pullback),” said Eric Lascelles, chief economics and rates strategist at TD Securities.
An International Monetary Fund report on Wednesday said more pain is in store for the Canadian economy because of its reliance on international trade and its high exposure to commodity prices. [ID:nN11413146]
Also, Canada’s independent budget office said data showing a 3.4 percent annual rate of economic contraction in the fourth quarter — the worst since 1991 — was actually too upbeat.
“They’ve all had their own particular angle, but the bottom line is still that the Canadian economy is in some pretty grim shape,” Lascelles said.
The two reports add to the already pessimistic view ahead of this Friday’s set of top-tier monthly statistics — jobs and trade. There is little doubt among market players that the numbers will reinforce the view that the economy is under great strain, which could put further pressure on the currency.
A Reuters survey found that analysts expect the economy to have shed 52,500 jobs in February after a drop of 129,000 jobs in January, while trade data for January is expected to show Canada’s trade deficit more than doubled to C$1 billion.
The currency has had a volatile week so far, mostly on the swiftly changing appetite for risk. The Canadian dollar hit a high at C$1.2725 to the U.S. dollar, or 78.59 U.S. cents, on Tuesday, rebounding from the September 2004 low it touched at C$1.3066 to the U.S. dollar, or 76.53 U.S. cents, on Monday.
Canadian bond prices turned higher on Wednesday, following U.S. Treasuries, as U.S. stock markets lost most of their early gains.
The appeal of the safe haven government debt is often curbed when riskier assets, such as stocks, are favored.
Although the Toronto Stock Exchange main index closed higher for a second straight session, Canadian government bonds took their cues from U.S. stocks, which closed well off the day’s highs. [ID:nN11314027]
“Earlier gains in equities weren’t sustained and that may have resulted in funds moving back into fixed income,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.
Expectations that the upcoming Canadian monthly jobs and trade data may paint a dire picture of the economy in the first quarter may also be supporting the bonds’ firmer tone.
The two-year bond was unchanged at C$103.01 to yield 0.983 percent. The 10-year bond gained 77 Canadian cents to C$107.35 to yield 2.912 percent.
The 30-year bond advanced C$1 to C$123.45 to yield 3.660 percent. The U.S. 30-year bond yielded 3.65 percent. (Additional reporting by Jeffrey Hodgson; Editing by Peter Galloway)