By Frank Pingue
TORONTO, Feb 14 (Reuters) - The Canadian dollar finished a touch lower versus the U.S. dollar on Thursday as data showed Canada's trade surplus shrank more than expected in December, but the currency remained locked in a tight range.
Canadian bond prices edged higher on the short end of the curve as the economic data added further credence to the idea of additional Bank of Canada rate cuts.
The Canadian dollar closed at C$1.0002 to the U.S. dollar, or 99.98 U.S. cents, down from 99.70 Canadian cents per U.S. dollar, or US$1.0030, at Wednesday's close.
Figures that showed Canada's trade surplus fell to a nine-year low in December knocked the Canadian dollar to a session low of C$1.0017, or 99.83 U.S. cents, early in the session.
The currency rebounded and hit a session high of US$1.0030, or 99.70 Canadian cents, by midday due to a weaker U.S. dollar after the U.S. Federal Reserve said the outlook for the U.S. economy had worsened.
But the currency eased in the latter half of the session as investors focused more on the negative data instead of the favorable Canada-U.S. interest rate gap that is expected to remain in the Canadian dollar's favor for some time.
"That should be better for the Canadian dollar, but weighing against it is people are still worried that a slowdown in the U.S. at some point will take a bite out of the Canadian economy," said Steven Butler, director of foreign exchange at Scotia Capital.
"And even though we keep seeing (Canadian) employment numbers dismissing all the bad news and plowing ahead with good news, I think it's still a worry on people's minds."
The Canadian jobs report for January, released last week, showed the economy added four times more jobs than expected, which forced some market experts to rethink the size of their Bank of Canada interest rate cut predictions.
Butler said the Canadian dollar is not finding much support near the US$1.0060 and US$1.0080 range and could have trouble doing that as the market awaits the Bank of Canada's next scheduled interest rate announcement on March 4.
"Whether it takes a bit of shock news or a big move in the U.S. dollar one way or the other, I get the feeling that we are going to be stuck here for a little while," Butler said.
Canadian bond prices got a boost on the short end of the curve as the Canadian trade data reinforced the likelihood that the Bank of Canada will cut rates in March to help cushion the economy from the effects of the U.S. housing recession.
"It changes the profile perhaps for Canadian policy rates going forward ... the Bank of Canada may ease a little more aggressively incrementally because of this," said Michael Gregory, senior economist at BMO Capital Markets. "Those odds at least have built up, so that's why the short end did that."
The central bank's key interest rate, which it cut by 25 basis points at each of its last two interest-rate setting dates, is at 4.00 percent.
The two-year bond rose 6 Canadian cents to C$102.08 to yield 3.041 percent. The 10-year bond slid 16 Canadian cents to C$100.80 to yield 3.895 percent.
The yield spread between the two- and 10-year bond was 85.4 basis points, up from 83.9 basis points at the previous close.
The 30-year bond dropped 42 Canadian cents to C$112.08 to yield 4.273 percent. In the United States, the 30-year Treasury yielded 4.636 percent.
The three-month when-issued T-bill yielded 3.26 percent, unchanged from the previous close. (Editing by Peter Galloway)