C$ rises as economy contracts less than expected

TORONTO: The Canadian dollar strengthened against the greenback on Tuesday despite a drop in oil prices after data showed Canada's economic performance in January was stronger than expected.

The economy shrank by a smaller-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.

"The slightly better-than-expected Canadian GDP in January, though still showing broad weakness, helped to take the Canadian dollar off its lows," said Camilla Sutton, chief currency strategist at Scotiabank.

The Canadian dollar ended the North American session at 1.2666 to the US dollar, or 78.95 US cents, slightly stronger 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 Don Mikolich, executive director, foreign exchange sales at CIBC World Markets.

Oil fell as investors waited on a possible nuclear pact that could release more Iranian crude into an oversupplied market, although prices backed off session lows with no word of a deal as the clock ticked toward the talks' self-imposed deadline on Tuesday.

Six world powers, consisting of the United States, Britain, France, Germany, Russia and China, are negotiating with Iran in Switzerland for an outline deal on Tehran's nuclear program that would be integral to removing sanctions on its oil exports.

Canadian government bond prices were mixed across the maturity curve, with the two-year falling 0.5 Canadian cents to yield 0.510 percent and the benchmark 10-year rising 6 Canadian cents to yield 1.365 percent.