August 30, 2018 / 2:41 PM / a month ago

CANADA FX DEBT-C$ falls, bond prices rise as GDP data disappoints

 (Updates market action, adds quote)
    * GDP rose 2.9 pct in Q2, growth stalled in June
    * Traders see little chance BOC hiking rates next week
    * Higher oil prices, hopes for NAFTA deal limit C$ losses
    * Canadian bond prices rise, yield curve flattens

    By Richard Leong
    Aug 30 (Reuters) - The Canadian dollar fell versus the
greenback on Thursday as data showed the economy grew at a
slower pace in the second quarter than forecast, supporting
traders' view the Bank of Canada will leave key interest rates
on hold next week.
    Prices on domestic government debt rose in the wake of the
latest gross domestic product figures, flattening the yield
curve on the notion of slowing economic growth amid U.S.-Canada
trade talks.
    Still increasing oil prices and optimism that Ottawa will 
secure a deal in a revamped North American Free Trade Agreement
(NAFTA) limited loonie's losses and the rise in bond prices,
traders said.
    "Canada's Q2 GDP has missed the mark marginally,
disappointing investors," said Stephen Innes, head of trading in
Asia with Oanda in Singapore. "It's still a substantial number
by any standard, so the question is to trade or fade."
    Canada's economy grew at a 2.9 percent annualized rate in
the second quarter, the fastest in a year but a tad slower than
the 3.0 percent pace seen among analysts polled by Reuters. GDP
was unchanged in June, compared with an expected 0.1 percent
increase, Statistics Canada said on Thursday.             
    At 10:03 a.m. (1403 GMT), the loonie          was down
nearly 0.7 percent at C$1.2993 per U.S. dollar or 76.93 U.S.
cents per Canadian dollar           , Reuters data showed.
    The Canadian currency would readily reverse its decline if
Washington and Ottawa arrive at a new NAFTA deal by a Friday
deadline, analysts said.
    Canadian Foreign Minister Chrystia Freeland said late on
Wednesday that talks were at "a very intense moment" but added
there was "a lot of good will" between Canadian and U.S.
negotiators.             
    Canada sends about 75 percent of its exports to the United
States, so its economy could benefit if a trilateral trade deal
with the United States and Mexico is reached.
    If the trade picture improves, Canada stands to benefit from
the recent pickup in oil prices.
    Benchmark Brent crude futures         were up 0.5 percent at
$77.53 a barrel on signs of tightening global supply and lower
U.S. energy inventories.             
    Amid trade uncertainties, traders seemed confident the Bank
of Canada will leave its policy rate           at 1.50 percent
at its Sept. 5 meeting. 
    This BOC view, reinforced by the mildly disappointing GDP
data, propelled prices of Canadian bonds, particularly
longer-dated ones, higher, flattening the yield curve. 
    The spread between two-year and 10-year Canadian yields
               shrank nearly 1 basis point to 15.80 basis
points, according to Tradeweb.

 (Reporting by Richard Leong; Editing by Steve Orlofsky)
  
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