Canadian dollar stronger as trade deficit widens

TORONTO, July 6 (Reuters) – The Canadian dollar strengthened against its U.S. counterpart on Wednesday, boosted by a rebound in oil prices and shrugging off domestic economic risks as Canada posted a near-record trade deficit.

The loonie, as the currency is colloquially known, had weakened as investor jitters about the implications of Britain’s
vote to quit the European Union supported assets perceived as safe havens. The yield on Canadian government 10-year bonds
touched its lowest since February.

But the currency rebounded and bond yields recovered somewhat as prices for oil, a major Canadian export, jumped after two days of declines.

"The main theme driving the Canadian dollar turnaround today was a rebound in oil prices," said Adam Button, currency analyst
at ForexLive in Montreal. "The market is searching for a theme and trying to understand what comes next after a Brexit."

Canada posted its second-largest trade deficit on record in May, a large negative surprise, as widespread export weakness canceled out higher shipments from the battered energy sector, government data indicated.

The Canadian dollar settled at C$1.2959 to the greenback, or 77.17 U.S. cents, stronger than the Bank of Canada’s official close of C$1.3016, or 76.83 U.S. cents.

"The evidence on the weakness in the Canadian dollar so far paying dividends for the non-energy economy is quite patchy,"
said Adam Cole, global head of currency strategy for RBC Capital Markets in London, referring to the trade data.

"As long as that’s the case it’s a vulnerability for the currency," he said, adding that further weakness this year would
likely not push the currency beyond C$1.35.

Canadian government bond prices were mostly higher across the maturity curve, with the two-year price up 1.5 Canadian cents to yield 0.485 percent and the benchmark 10-year rising 16 Canadian cents to yield 0.979 percent.

The 10-year yield fell as low as 0.938 percent during the session.





The Canada-U.S. two-year bond spread was -9.6 basis points, while the 10-year spread was -40.0 basis points.

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