CANADA FX DEBT-C$ weakest since May 2010 as data disappoints

Tue Jan 7, 2014 12:17pm EST

* Canadian dollar at C$1.0736, or 93.14 U.S. cents

* Trade deficit widens in November

* October trade figures revised sharply weaker

* Ivey purchasing data sinks

* Bond yields lower across curve

By Alastair Sharp

TORONTO, Jan 7 (Reuters) - The Canadian dollar hit its weakest level against its U.S. counterpart since 2010 on Tuesday after Canada posted a surprisingly steep widening of its trade deficit, eroding market hopes the beleaguered export sector might be recovering.

The November deficit and a sharp downward revision to October's trade numbers knocked the wind from a nascent growth spurt for the Canadian economy, while a sharp contraction in purchasing activity in an Ivey survey for December added to the pessimistic tone.

The loonie, as Canada's currency is colloquially known, lost more than a cent in morning trade in the North American session, hitting C$1.0763, or 92.91 U.S. cents, for its weakest showing since May 25, 2010.

"There was some hope late last year that exports showed some pick-up, especially in September, but with the revision to October and again the weaker number in November, it showed that it was probably just one-off strength in September," said Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.

"It doesn't provide positive momentum going into this year," he added.

Shaun Osborne, the chief currency strategist at TD Securities, said his bank has a yearend target of C$1.11 for the currency, "but the way this is trading we're going to be there quite a bit sooner than that".

Nomura's St-Arnaud said there is a 30 percent probability that the Bank of Canada will cut interest rates in the next six months if economic growth slows further and inflation remains below the central bank's target.

The bank has said it has a neutral stance on interest rates, a shift that came in October after 18 months of signaling rate hikes were on the horizon.

Overnight index swaps, which trade based on expectations for the policy rate, are not forecasting a change in rates in the next 12 months.

But with many traders speculating the central bank is closer to easing policy than tightening it, any disappointments in upcoming data, including jobs numbers due on Friday, will likely hurt the currency more than a positive showing would help it.

"The Canadian dollar is going to be more sensitive to an asymmetric response to the data from here," Osborne said.

The weak domestic data contrasted with the U.S. trade deficit hitting its lowest level in four years in November as exports there hit a record high.

"Today's run of dismal data from Canada has nudged the door open to a potential rate cut in the months ahead, a dovish outlook that contrasts with expectations for the Fed to increasingly pare back on stimulus," Western Union Business Solutions senior market analyst Joe Manimbo wrote in a note.

The United States is Canada's main trading partner, with about three-quarters of Canada's exports going to its southern neighbor.

"We're still not getting that rotation away from domestically led growth to more trade and investment," TD's Osborne said of the domestic trade data.

The loonie moved C$1.0719 shortly after the trade data was released and then spiked as weak as C$1.0763 after the release of the Ivey data. It last traded at C$1.0736, or 93.14 U.S. cents.

Yields on Canadian government debt were lower across the maturity curve, with the two-year bond up 2 Canadian cents to yield 1.122 percent, while the benchmark 10-year bond rose 9 Canadian cents to yield 2.706 percent.

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