Canadian dollar strengthens to one-week high as Fed rate hike bets tumble

TORONTO (Reuters) - The Canadian dollar strengthened to a one-week high against its broadly weaker U.S. counterpart on Friday after a slowdown in U.S. jobs growth lowered chances of an interest rate hike by the Federal Reserve, offsetting disappointing domestic data.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

The U.S. economy created the fewest number of jobs in more than five years in May, pointing to labor market weakness that could make it difficult for the Fed to raise interest rates.

The Canadian dollar CAD=D4 ended at C$1.2943 to the greenback, or 77.26 U.S. cents, much stronger than Thursday's close of C$1.3105, or 76.31 U.S. cents.

The currency’s weakest level of the session was C$1.3105, while it touched its strongest since May 26 at C$1.2916. For the week it rose 0.6 percent.

However, the commodity-linked Canadian dollar lost ground against some other major currencies as oil fell.

Against the Japanese yen CADJPY=R, the loonie hit its lowest since April 8 at 82.19 yen, while U.S. crude oil futures CLc1 settled 55 cents lower at $48.62.

Investors also weighed the impact on Canada’s economy if growth in its biggest trading partner falters.

If the U.S. economy does not accelerate as the Bank of Canada expects it will put a rate cut “back on the table” for later this year, said Adam Button, a currency analyst at ForexLive.

The implied probability of a Bank of Canada interest rate cut this year jumped to more than 50 percent from less than 30 percent before the U.S. jobs data, overnight index swaps showed.

Canada’s trade deficit in April narrowed to C$2.94 billion ($2.24 billion) from a record C$3.18 billion in March.

However, the volume increase in Canadian exports “was slightly underwhelming,” said Nick Exarhos, economist at CIBC Capital Markets.

Speculators have raised bullish bets on the Canadian dollar, Commodity Futures Trading Commission data showed. Net long Canadian dollar positions rose to 26,259 contracts in the week ended May 31 from 20,047 contracts in the prior week.

Canadian government bond prices were higher across the maturity curve, with the two-year CA2YT=RR price up 10.5 Canadian cents to yield 0.507 percent and the benchmark 10-year CA10YT=RR rising 62 Canadian cents to yield 1.183 percent.

The 10-year yield hit its lowest since April 7 at 1.175 percent.

The gap between the yield on Canada’s 2-year bond and the comparable U.S. Treasury narrowed by 6 basis points, for a spread of -26.9 basis points, as U.S. yields fell more sharply than Canada’s.

Reporting by Fergal Smith; Editing by Nick Zieminski and Alan Crosby