TORONTO: The Canadian dollar strengthened against its US counterpart on Tuesday, supported by stronger crude prices and following data that showed a jump in Canada and the United States' trade deficits.
A record trade deficit of C$3.02 billion ($2.50 billion) in March initially sent the loonie into sharp retreat, but the currency quickly recouped losses, strengthening to a session high.
Investors also digested US trade numbers, which showed the deficit surged to its highest level in nearly 6-1/2 years.
"On the Canadian number ... real balance deteriorated a little bit, not quite as bad as the headline suggests," said Benjamin Reitzes, senior economist at BMO Capital Markets.
"On the US side, a huge increase in real imports. Real exports were just modestly higher, and that suggests we'll get a downward revision to Q1 for US GDP growth."
At 9:31 a.m. EDT (1331 GMT), the Canadian dollar, which was outperforming nearly all of its major counterparts, was trading at C$1.2053 to the greenback, or 82.97 US cents, stronger than the Bank of Canada's official close of C$1.2092, or 82.70 US cents.
The currency has traded between C$1.2048 and C$1.2131 so far in the session.
Market participants are also awaiting labor market data due on Friday, the first major economic figures for the second quarter. Both the Federal Reserve and the Bank of Canada have expressed optimism that the economic outlook would improve after the first quarter.
"There's a number of temporary factors in Q1 and you don't want to put too much emphasis on it, but you don't want to ignore it either. I think markets do understand that," said Reitzes.
In the near term, the Canadian dollar is expected to continue to find support from higher crude prices, which are well off the multi-year lows hit earlier this year.
Those gains are expected to be limited, however. Combined with an expected Fed rate hike this year, the loonie is still forecast to weaken over the medium term.
US crude prices were up 2.72 percent to $60.53, while Brent crude added 2.24 percent to $67.94 to 2015 highs.
Canadian government bond prices were mixed across the maturity curve, but both the two-year price was up 4 Canadian cents to yield 0.692 percent and the benchmark 10-year rose 4 Canadian cents to yield 1.711 percent.
The Canada-US two-year bond spread was 9.7 basis points, while the 10-year spread was -43.1 basis points.
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