Canadian dollar slides as September rate hike prospects fade on GDP miss

(Reuters) - The Canadian dollar fell versus the greenback on Thursday as data showed the domestic economy grew at a slower pace in the second quarter than forecast, supporting traders’ view the Bank of Canada will leave interest rates on hold next week.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, Ontario, Canada, January 23, 2015. REUTERS/Mark Blinch/File Photo

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.

“Canada’s Q2 GDP has missed the mark marginally, disappointing investors,” said Stephen Innes, head of trading in Asia with Oanda in Singapore.

Chances of another interest rate hike from the Bank of Canada as soon as an announcement on Sept. 5 fell to 16 percent from more than 20 percent before the data, the overnight index swaps market showed. BOCWATCH

The loonie has been boosted this week by investor optimism that a bilateral deal to revamp the North American Free Trade Agreement will be reached before a Friday deadline. Still, work remains on specific issues.

“We don’t see a deal being struck (this week),” said Andrew Sierocinski, a foreign exchange analyst at Klarity FX. “We think this loonie weakness is justified.”

Canada sends about 75 percent of its exports to the United States, so its economy could be hurt if a deal is not reached.

At 2:52 p.m. (1852 GMT), the Canadian dollar CAD=D4 was trading 0.6 percent lower at C$1.2993 to the greenback, or 76.96 U.S. cents. The currency traded in a range of C$1.2904 to C$1.3000.

The decline for the loonie came as a Canadian court overturned approval of the Trans Mountain oil pipeline expansion in a blow to Prime Minister Justin Trudeau’s efforts to balance environmental and economic issues.

The price of oil, one of Canada's major exports, was boosted by growing evidence of disruptions to crude supply from Iran and Venezuela and after a fall in U.S. crude inventories. U.S. crude oil futures CLc1 settled 1.1 percent higher at $70.25 a barrel.

Canadian government bond prices were higher across a flatter yield curve, with the 10-year CA10YT=RR rising 38 Canadian cents to yield 2.277 percent.

The gap between Canada’s 10-year yield and its U.S. equivalent widened 2.8 basis points to a spread of 58.9 basis points in favor of the U.S. bond.

Additional reporting by Richard Leong; Editing by Steve Orlofsky and David Gregorio