The Canadian dollar strengthened on Friday, capping a sharp reversal from early-week softness, as the US currency slid further after falling hard in the previous session. Domestic bond prices eased in thin trade, as traders looked ahead to central bank speakers and economic data next week. The currency finished at C$1.2366 to the US dollar, or 80.87 US cents, up from C$1.2422 to the US dollar, or 80.50 US cents, at Thursday's close.
With little news for traders to chew on, the currency stayed in a close range throughout the day.
"Canada's holding on to its gains after the big move yesterday, and I think it's more or less consolidation at these levels," said Jack Spitz, director of foreign exchange at National Bank of Canada.
"Market players are reluctant to take on new positions ahead of the weekend."
The domestic currency initially lost ground on Thursday after Canada's December trade surplus came in at C$5.2 billion, just below estimates, while the US trade deficit narrowed to $56.4 billion, against forecasts of $57 billion.
But it then snapped back, finishing the day at its highest level in nearly a week, as the market looked deeper into the numbers and decided the US dollar's recent rise had gone far enough.
The sharp rebound suggested the Canadian dollar could see some short-term strength against the greenback, although traders expect it to eventually fall back towards the lower end of its recent range.
"I still think, over the course of time, the US dollar should be bid against other currencies, and Canada should more than likely trend back towards 80 US cents, rather than 81 US cents," Spitz said.
The Canadian dollar's brief slide below 80 US cents earlier this week was triggered by US Federal Reserve Chairman Alan Greenspan's comments last Friday that the US current account deficit could be reduced by market forces and tighter US fiscal policy.
Meanwhile, the Canadian government said on Friday it rang up a budget surplus of C$280 million in December, adding to money it will be able to draw on when its budget for the 2005-06 fiscal year is released on February 23.
This brings the cumulative surplus for the first nine months of the 2004-05 fiscal year to C$10.99 billion from C$7.33 billion in the same period last year.
Canadian bonds slipped, following the lead of weaker US treasuries, but ended the session little changed as flows dried up ahead of the weekend.
Next week, the market will be closely watching December manufacturing and wholesale trade data, looking for more signs of the economic impact of the Canadian dollar's 2003-04 gains.
In its most recent Monetary Policy Report update, the Bank of Canada said it was still committed to the idea of higher interest rates in the long term, but rate hikes would come at a slower pace than was forecast three months earlier.
The two-year bond slipped 3 Canadian cents to C$100.56 to yield 2.926 percent, while the 10-year bond slid 5 Canadian cents to C$106.31 to yield 4.174 percent.
The yield spread between the two-year and 10-year bond moved to 124.8 basis points from 125.5 basis points at the previous close.
The 30-year bond, due 2029, fell 13 Canadian cents to C$117.40 to yield 4.639 percent. In the United States, the 30-year treasury yielded 4.478 percent.
The three-month when-issued T-bill yielded 2.48 percent, up from 2.47 percent at the previous close.
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