Loonie pares weekly gain as soft data lifts rate cut bets

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday, giving up much of this week’s gains after domestic data showing a surprise decline in retail sales revived bets for a Bank of Canada interest rate cut next year.

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

Canadian retail sales dropped by 1.2% in October, including lower sales of motor vehicles and parts, Statistics Canada said. Analysts had forecast a 0.5% increase.

“With the exception of housing markets, Canadian economic releases in the past few weeks have been unambiguously negative,” Omar Abdelrahman, an economist at TD Economics, said in a note. “This one is no different. As a result, we are expecting a continued tepid performance for the Canadian economy in the fourth quarter.”

Chances of a rate cut over the coming year, which had dwindled in recent weeks, jumped to nearly 50% from about 25% before the retail sales report, the overnight index swaps market indicated.

Separate data showed that new-home prices fell 0.1% in November after rising 0.1% in October.

At 2:34 p.m. (1934 GMT), the Canadian dollar CAD=D4 was trading 0.3% lower at 1.3159 to the greenback, or 75.99 U.S. cents. The currency, which notched on Wednesday a seven-week high at 1.3103, traded in a range of 1.3123 to 1.3181.

For the week, the loonie was up 0.1% after a boost from data showing higher Canadian underlying inflation and a trade deal between the United States and China.

Canada is a major exporter of commodities, including oil, so its economy could benefit from an improved outlook for global trade.

U.S. crude oil futures CLc1 settled 1.2% lower at $60.44 a barrel on Friday but were still up for the third straight week after easing U.S.-Chinese trade tensions lifted business confidence and the outlook for global economic growth.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 6.5 Canadian cents to yield 1.662% and the 10-year CA10YT=RR rising 36 Canadian cents to yield 1.620%.

The gap between Canada’s 10-year yield and its U.S. counterpart widened by 5.2 basis points to a spread of 29.9 basis points in favor of the U.S. bond.

Reporting by Fergal Smith; Editing by Steve Orlofsky and Will Dunham