Canadian dollar firms as stocks rally, NAFTA optimism offset GDP miss

TORONTO (Reuters) - The Canadian dollar rose against its U.S. counterpart on Thursday as firmer stock prices and optimism about a North American Free Trade Agreement (NAFTA) trade deal offset data showing the domestic economy unexpectedly contracted at the start of the year.

U.S. and Canada Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading 0.3 percent higher at C$1.2883 to the greenback, or 77.62 U.S. cents. The currency's strongest level of the session was C$1.2862, while it touched its weakest since Friday at C$1.2940.

For the quarter, the loonie was headed for a 2.3 percent decline, which would be its deepest since the final quarter of 2016.

The Canadian economy shrank by 0.1 percent in January, short of analysts’ estimates for a 0.1 percent increase, in a clear sign that first-quarter growth is likely to be weaker than the Bank of Canada had predicted.

“I think the Canadian dollar really hasn’t reflected a lot of the weakness (in the economic data), said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. “I think, in part, because it has some favorable push from NAFTA and getting excluded from the tariff actions.”

U.S. Trade Representative Robert Lighthizer on Wednesday expressed optimism that talks to modify NAFTA could be wrapped up quickly, but a top Canadian official was more downbeat, saying much work remained.

Wall Street surged, bringing an upbeat end to a tumultuous, holiday-shortened week as technology stocks rebounded.

Canada’s commodity-linked currency tends be sensitive to stock market performance due to the signal it sends about the strength of the global economy.

The price of oil, one of Canada’s major exports, rose as stocks rallied and as market participants weighed a rise in U.S. crude inventories and production against continued supply curbs by major producers.

U.S. crude oil futures CLc1 settled 1.1 percent higher at $70.27 a barrel.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 5.5 Canadian cents to yield 1.776 percent and the 10-year CA10YT=RR rising 24 Canadian cents to yield 2.092 percent.

The gap between the 2-year yield and its U.S. equivalent widened by 1.4 basis points to a spread of -49.4 basis points.

Canada’s bond market will be closed on Friday for Good Friday.

Reporting by Fergal Smith; Editing by Richard Chang