The Canadian dollar weakened to a seven-month low against its US counterpart on Friday as weaker-than-expected domestic data fueled interest rate cut bets and the greenback made broad-based gains. For the week, the loonie fell 1.4 percent, its largest one-week decline since early May, according to Reuters data. A drop in Canadian retail sales in August and cooler-than-anticipated annual inflation in September reinforced speculation the Bank of Canada may lower interest rates again, after the bank acknowledged this week it had considered cutting.
"There is definitely more focus on the Bank of Canada, therefore more focus on the data. So even a small downside miss seems to have had a disproportionate impact on the currency," said Daniel Katzive, head of FX strategy North America at BNP Paribas. The implied probability of a Bank of Canada interest rate cut by mid-2017 jumped to more than 40 percent from around 30 percent before the data, overnight index swaps data showed. "Not all the move is reflecting simply what is going on in Canada, because the (US) dollar is stronger pretty much against everything," Katzive said. The US dollar climbed to a 8-month high against a basket of major currencies.
The Canadian dollar ended at C$1.3327 to the greenback, or 75.04 US cents, weaker than Thursday's close of C$1.3222, or 75.63 US cents. The currency's strongest level of the session was C$1.3226, while it touched its weakest since March 16 at C$1.3354. Losses for the loonie came despite gains for crude oil, one of Canada's major exports. US crude prices settled 22 cents higher at $50.85 a barrel. Speculators increased bearish bets on the Canadian dollar to the most since March, Commodity Futures Trading Commission data showed. Net short Canadian dollar positions rose to 14,298 contracts in the week ended October 18 from 11,704 in the prior week.
Canadian government bond prices were higher across the yield curve, with the two-year up 6.5 Canadian cents to yield 0.52 percent and the benchmark 10-year rising 44 Canadian cents to yield 1.126 percent. The 2-year yield fell 4.1 basis points further below its US equivalent, to leave a spread of -31.2 basis points, its widest since June 2, indicating outperformance for Canadian government bonds. Canada's trade minister walked out of talks in Belgium, declaring that the European Union was incapable of sealing a planned transatlantic free trade deal designed to boost growth in both economies.
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