* Current account deficit, U.S. data, euro zone set tone
* Bond prices push higher across curve (Updates to close, adds details, commentary)
By Claire Sibonney
TORONTO, Aug 30 (Reuters) - The Canadian dollar drifted lower against the greenback on Tuesday, taking its cue from gloomy domestic and U.S. economic data as investors awaited a report on Canada’s GDP on Wednesday.
An unexpectedly large Canadian current account deficit undermined the risk-related currency, as did data that showed U.S. consumer confidence plunged in August to its lowest point in two years. [ID:nN1E77T0QG] [ID:nN1E77T0DO]
Data also showed U.S. single-family home prices dipped in June from May as the market continued to crawl along at depressed levels.
“We get encouraging news in terms of consumer spending numbers in the U.S. and then get disappointment with weakness in confidence and the U.S. housing market,” said Paul Ferley, deputy chief economist at Royal Bank of Canada.
“We seem to be getting shifting indications of the pace of recovery in the U.S. and that seems to be buffeting financial markets generally. The Canadian dollar is getting caught up in that.”
In the euro zone, a poorly received Italian debt auction and bickering among countries about a bailout deal for Greece also spurred bearish sentiment. [FRX/]
After a fairly volatile session, the Canadian dollar CAD=D3 ended at C$0.9782 to the U.S. dollar, or $1.0223, down slightly from Monday’s close at C$0.9771 versus the greenback, or $1.0234.
The currency recovered from earlier lows, however, on the back of firmer U.S. equities and oil prices, which rose on optimism about fresh economic stimulus after the U.S. Federal Reserve released minutes of its August meeting of policymakers. [O/R] [.N]
Looking ahead to Canada’s June and second-quarter gross domestic product reports on Wednesday morning, analysts say the risk is tilted to the downside.
Second-quarter growth is largely expected to have stalled after extraordinary strength in the first quarter, in part because of disruptions caused by the Japanese earthquake and tsunami in March. The strong Canadian dollar and weak U.S. markets also hit exports. [ID:nN1E77P0F0]
“With a sizable drag from net exports, there’s the risk that the growth numbers in Q2 could be negative and so I think there’s that concern - and certainly even Bank of Canada Governor Mark Carney suggests the possibility of a small decline,” said Ferley.
The nervous trade on Tuesday was also attributed to anticipation over Friday’s U.S. nonfarm payrolls numbers for August. Canadian employment data for the month is due the following week.
Canadian bond yields tracked market risk appetite lower as prices picked up steam. The two-year bond CA2YT=RR was up 6 Canadian cents to yield 1.032 percent, while the 10-year bond CA10YT=RR rallied 54 Canadian cents to yield 2.399 percent.
Canadian prices underperformed their U.S. counterparts at the long end of the curve, but outperformed in the interest-rate sensitive two-year area, as expectations of a rate increase by the Bank of Canada have recently receded.
“(Investors) are pretty much taking the Fed at their word that they’re not going to move until the middle of 2013, so in terms of volatility there’s more scope for Canada probably to move in the rates space,” said Mazen Issa, Canada macro strategist at TD Securities. (Editing by Rob Wilson)