C$ pares losses as economy contracts less than expected

TORONTO: The Canadian dollar weakened against the greenback on Tuesday but was well off its early lows after data showed Canada's economic performance in January was stronger than foreseen.

The economy shrank by a less-than-expected 0.1 percent in the first month of the year as a slump in service-industry activity was offset by a rebound in oil and gas extraction.

The consensus view had been for a 0.2 percent slide, but markets had been bracing for an even weaker number, particularly after Bank of Canada Governor Stephen Poloz said in an interview published on Monday that 2015's first quarter will look "atrocious" due to the fallout from the plunge in the price of oil, a major Canadian export.

"We have seen a little bit of a rally here. Over the past couple of days anticipation of a bad number has been weighing on Canada as much as commodity prices have also taken a toll," said Don Mikolich, executive director, foreign exchange sales at CIBC World Markets.

"Any number worse than consensus at least, we could've been pushing up to year (dollar) highs, on our way to the $1.30 handle, which some people have as a medium-term target."

At 9:20 a.m. (1320 GMT), the Canadian dollar was at $1.273 to the US dollar, or 78.60 US cents, roughly half a cent stronger than immediately before the data's release, but still weaker than Monday's finish of C$1.2693, or 78.78 US cents.

Earlier the currency had weakened almost a full cent amid a US dollar rally and a drop in US crude prices below $48 a barrel.

"The US dollar index has been seeing some gains across the board. There's been enough (global) uncertainties ... it's still been a very pro-US dollar environment," said Mikolich, adding that crude prices were also putting a cap on Canadian dollar moves.

Iran and six world powers entered a final day of negotiations on Tuesday over a nuclear deal that could see Iran increase oil exports to an already well-supplied market. Meanwhile, US commercial crude stocks are anticipated to have risen to a record high for a 12th week, according to a Reuters poll.

Canadian government bond prices were mostly lower across the maturity curve, with the two-year falling 3.5 Canadian cents to yield 0.526 percent and the benchmark 10-year slipping 13 Canadian cents to yield 1.385 percent.