CANADA FX DEBT-C$ retreats as GDP soft in Canada, stronger in U.S.

Wed Jul 31, 2013 10:12am EDT

* C$ at C$1.325 vs US$, or 96.85 U.S. cents
    * Canada's GDP grew 0.2 pct in May
    * U.S. Q2 GDP grew 1.7 pct annualized
    * C$ hits strongest level against Aussie in nearly 3 years
    * 10-yr yield near 2-yr high; 30-yr highest since Oct. 2011

    By Solarina Ho
    TORONTO, July 31 (Reuters) - The Canadian dollar softened to
its lowest level in more than a week against the U.S. dollar on
Wednesday after data showed unexpectedly strong 1.7 percent
growth U.S. GDP in the second quarter and weaker-than-foreseen
GDP growth in Canada in May.
     Canadian gross domestic product grew by 0.2 percent in May
from April, a lower-than-forecast figure that trimmed
expectations for second-quarter GDP. The median forecast in a
Reuters survey was for 0.3 percent growth, ahead of what is
expected to be a poor June reading due to floods in Alberta and
a construction strike in Quebec. 
    But U.S. economic growth unexpectedly accelerated during the
second quarter, expanding at a 1.7 percent annual rate and 
laying a firmer foundation for the rest of the year that could
bring the U.S. Federal Reserve closer to cutting back on its
stimulus measures. 
    "A pleasant surprise on the upside for U.S. growth prospects
heading into what is expected to be even stronger growth in the
second half of the year," said Craig Wright, chief economist at
Royal Bank of Canada.
    "On a relative basis, GDP in the U.S. looked a little
better, Canada looked a little softer. That, alongside softer
commodity prices, explains the slightly weaker Canadian dollar,"
he said.
    The Canadian dollar was trading at C$1.319 versus
the U.S. dollar, or 96.91 U.S. cents, at 9:33 a.m. (1333 GMT),
after dropping as low as C$1.0337, or 96.74 U.S. cents, earlier.
The currency was weaker than it was immediately before the GDP
figures were released and down from Tuesday's North American
session close of C$1.0302, or 97.07 U.S. cents.
    The Canadian dollar was outperforming other major
currencies, however, and touched its strongest level against the
Australian dollar in nearly three years.
    The currency is expected to find further direction when the
Fed issues its latest policy statement later on Wednesday.
Investors will be seeking clues on when the U.S. central bank
will curb its bond-buying stimulus program.
    Longer-term bond yields have risen over the last few months
as encouraging economic data has bolstered expectations the Fed
will begin winding down its bond-buying plan this fall. The Bank
of Canada is seen raising interest rates next year. 
    Government bond prices generally fell across the maturity
curve. The two-year bond was off 4.2 Canadian cents
to yield 1.204 percent, while the benchmark 10-year bond
 fell 45 Canadian cents to yield 2.572 percent, its
highest yield since August, 2011. 
    Yields on the 30-year bond crossed the 3 percent
mark to touch the highest level since October 2011.
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