CANADA FX DEBT-C$ ends stronger after trade deficit narrows

Thu Mar 7, 2013 4:53pm EST

* C$ ends at C$1.0294 to US$, or 97.14 U.S. cents

* Canada trade deficit narrows while U.S. gap widens

* Jobs data on Friday eyed for direction

By Alastair Sharp

TORONTO, March 7 (Reuters) - The Canadian dollar strengthened against the U.S. dollar on Thursday after data showed Canada's trade deficit narrowed in January as exports grew at a faster rate than imports.

The currency also benefited from the greenback's fall versus the euro after European Central Bank President Mario Draghi gave no indication the bank would cut euro-zone interest rates further.

"Dollar/Canada moved on the coattails of the euro movement," said Matt Perrier, a managing director of foreign exchange sales at BMO Capital Markets.

The loonie, as Canada's currency is known colloquially, has weakened sharply in recent weeks to trade above C$1.03 to the U.S. dollar after changing hands at equal value in mid-February.

It closed at C$1.0294 to the greenback, or 97.14 U.S. cents, on Thursday, after ending Wednesday's North American session at C$1.0315.

In the cross against the euro, Canada's currency weakened to above C$1.35 at one point, a full Canadian cent softer than Wednesday's close.

The Canadian trade data compared favorably with a widening trade deficit in the United States, Canada's largest trading partner by far.

"The combination of data points, if you look at the two trade balances, did favor a softening in dollar/CAD," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London.

But he said he doubted the loonie's ability to sustain gains.

Many currency strategists have turned more bearish on the Canadian dollar in recent weeks, concerned by data showing a cooling housing market and slower growth.

Toronto-Dominion Bank on Thursday slashed its forecasts for the loonie by several cents across the coming quarters.

Canada's No. 2 bank cited slowing Canadian growth, increased slack in the economy and tepid inflation for the forecast changes. It said the Bank of Canada is now likely to hold off on a rate hike until the end of 2014.

Still, a Reuters poll on Wednesday showed forecasters expect the Canadian dollar will recover some of its early 2013 losses and trade at equal value against its U.S. counterpart by the end of this year.

If North American jobs data due out on Friday diverge drastically - with U.S. numbers buoyant and Canadian tepid - the loonie could head towards its weakest 2012 level of around C$1.0450, CIBC'S Stretch said.

Forecasters predict a gain of 8,000 jobs in Canada for February.

"We will get a reaction if it's a big swing one way or the other, particularly if we get another number like last month," Perrier said, referring to a loss of about 22,000 jobs in Canada in January.

Canadian government bond prices were lower across the curve, with the two-year bond off 5 Canadian cents to yield 0.958 percent, while the benchmark 10-year bond fell 31 Canadian cents to yield 1.883 percent.

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