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Oct 31, 2017

Loonie weakens on surprise GDP contraction

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The Canadian dollar weakened against its U.S. counterpart on Tuesday after data showing a surprise contraction of the domestic economy supported the Bank of Canada's caution on further interest rate hikes.

Canada's gross domestic product declined 0.1 per cent in August following flat growth in July, in part due to maintenance shutdowns in major industries. Analysts had forecast an increase of 0.1 per cent.

"Any piece of data that would confirm the Bank of Canada's caution would have an outsized effect on the currency," said Eric Theoret, currency strategist at Scotiabank. "The Canadian dollar was vulnerable."

Canada is at a "crucial" spot in the economic cycle with significant uncertainties clouding the way forward, Bank of Canada Governor Stephen Poloz said. The central bank, which hiked rates in July and September for the first time in nearly seven years, left its benchmark rate unchanged at 1 per cent last week.

At 4 p.m. ET, the Canadian dollar was trading at $1.2900 to the greenback, or 77.52 cents US, down 0.5 per cent. The currency traded in a range of $1.2825 to $1.2915. On Friday, it touched its weakest in more than three months at $1.2916. 

In separate domestic data, producer prices fell by 0.3 per cent in September from August as a stronger Canadian dollar helped cut prices for motorized and recreational vehicles. 

Canada's October employment report and trade data for September are due on Friday. 

The U.S. Federal Reserve will make an interest rate decision on Wednesday. 

Prices of oil added to recent gains. U.S. crude prices settled up 0.4 per cent at US$$54.38 a barrel.

Canadian government bond prices were higher across the yield curve, with the two-year up 2.5 cents to yield 1.393 per cent and the 10-year rising six cents to yield 1.951 per cent. Canadian yields fell further below yields on U.S. Treasuries across much of the curve. The gap between Canada's two-year yield and its U.S. counterpart widened by 3.2 basis points to a spread of -20.7 basis points, its widest since July 11.

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