Canadian dollar weakens into month-end after posting earlier five-month high

TORONTO (Reuters) - The Canadian dollar weakened slightly against its U.S. counterpart on Thursday, turning lower on month-end transactions after strong domestic data helped drive the currency to a five-month high earlier.

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

Month-end buying of U.S. dollars was accompanied by unwillingness to be short the greenback ahead of Friday’s U.S. employment report, according to analysts.

“I think this is nothing more than a month-end, quarter-end short-squeeze with a little U.S. dollar demand,” said Patric Booth, head of derivatives trading at Velocity Trade.

Still, the Canadian dollar ended the first quarter 6.5 percent higher than at the end of 2015. It has rallied more than 13 percent since hitting a 12-year low in January at C$1.4689, helped by recovery in crude oil prices, stabilization in financial markets and reduced expectations for Bank of Canada rate cuts.

It approached key resistance between C$1.2800 and C$1.2830, according to Bipan Rai, executive director, macro strategy at CIBC Capital Markets.

“The inability to close below there for today implies further consolidation to come,” he added, suggesting there may be a cap on the upside for the currency.

Canada’s economy grew by a much larger-than-expected 0.6 percent in January. It was the fourth straight monthly gain and the biggest since July 2013.

That puts the economy on track to grow much faster than the Bank of Canada’s 1 percent estimate for the first quarter, according to Paul Ferley, assistant chief economist at Royal Bank of Canada.

The implied probability of a rate cut this year dropped to less than 20 percent from 26 percent before the data. It was more than 50 percent at the start of the month. BOCWATCH

The Canadian dollar CAD=D4 ended at C$1.2987 to the greenback, or 77.00 U.S. cents, weaker than Wednesday's close of C$1.2965, or 77.13 U.S. cents.

The currency’s weakest level of the session was C$1.3012, while it touched its strongest since Oct. 16 at C$1.2859.

U.S. crude CLc1 prices were down 0.47 percent at $38.14 a barrel, but still posting large monthly gains. [O/R]

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR price down 2 Canadian cents to yield 0.544 percent and the benchmark 10-year CA10YT=RR falling 6 Canadian cents to yield 1.232 percent.

The Canada-U.S. two-year bond spread narrowed 5.1 basis points to -18.1 basis points, its least negative since Nov. 3. Meanwhile, the 10-year spread was 6 basis points narrower at -54.5 basis points, its least negative since Oct. 20, as Canadian government bonds underperformed.

Reporting by Fergal Smith; Editing by Meredith Mazzilli and Andrew Hay