C$ weakens as Trump considers NAFTA withdrawal

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday after a U.S. official said the White House was considering a draft executive order to withdraw from the NAFTA trade deal between the United States, Canada, and Mexico.

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 loonie, as the Canadian currency is colloquially known, ended above C$1.36 versus the greenback for the first time since February last year, but did not breach the 14-month high it hit during Tuesday’s session after the imposition of U.S. duties averaging 20 percent on imports of Canadian softwood lumber.

“For me, the most meaningful thing is that we didn’t break yesterday’s dollar-Canada high, which is a bit surprising,” said Eric Theoret, a currency strategist at Scotiabank in Toronto.

“It would suggest the market isn’t attributing an extremely high probability to this actually happening,” he said, referring to a withdrawal rather than a renegotiation of the pact.

U.S. President Trump has long accused Mexico of destroying U.S. jobs and recently ramped up his criticism of Canada, saying last week that Ottawa’s protection of its dairy industry was “unfair.”

He proposed on Wednesday to slash tax rates for U.S. businesses and on overseas corporate profits returned to the country.

The Canadian dollar CAD=D4 settled at C$1.3612 to the greenback, or 73.46 U.S. cents, compared to the Bank of Canada's official close on Tuesday of C$1.3579, or 73.64 U.S. cents.

The currency traded in a range of C$1.3543 to C$1.3623.

Prices for oil, a major Canadian export, rebounded from early losses after U.S. government data showed a larger-than-expected falloff in crude inventories, offsetting worries that a global crude glut was persisting despite output cuts by producing countries. [O/R]

Canadian retail sales fell a more-than-expected 0.6 percent in February, data showed, while January figures were revised slightly higher.

The data does not alter the outlook for strong economic growth in the first quarter, said Andrew Kelvin, senior rates strategist at TD Securities. He expects gross domestic product to rise around three percent annualized.

Canadian government bond prices were higher across a flatter yield curve, with the two-year CA2YT=RR up 4 Canadian cents to yield 0.739 percent and the 10-year CA10YT=RR rising 39 Canadian cents to yield 1.478 percent.

The 10-year yield fell 1.9 basis points further below its U.S. equivalent to a spread of -80.5 basis points, after hitting its widest since January 2016 during the session.

Additional reporting by Fergal Smith