TORONTO: The Canadian dollar strengthened against most of its key counterparts, including the US dollar, on Thursday, supported by firmer oil prices and a smaller-than-expected July trade deficit in Canada.
Canada's export sector posted healthy growth for the second month in a row in July, helping cut the country's trade deficit to an eight-month low of C$593 million. This was significantly less than the C$1.30 billion economists had forecast.
Meanwhile, volatile crude prices rose alongside equity gains on Wall Street but pulled back ahead of Friday's employment report.
Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets, said the loonie did not react much initially to the trade data, and instead rallied when oil prices begin rising.
"Oil's backed off, and the Canadian dollar has backed off a little bit as well. It's maintained a little bit of those gains though, maybe on the back of that better data for Canada," said Reitzes.
Following the data, markets were pricing in a lower probability the Bank of Canada would cut interest rates by 25 basis points for a third time this year at its next meeting in September.
The Canadian dollar finished at C$1.3194 to the greenback, or 75.79 US cents, stronger than the Bank of Canada's official close of C$1.3271, or 75.35 US cents on Wednesday.
The loonie traded between C$1.3135 and C$1.3289 during the session.
"There's still a lot of headwinds for the loonie though ... but for now, it looks like the bank will likely be on hold," said Reitzes, adding that an eventual rate cut by the central bank has not been ruled out yet due to the volatile price of oil.
Market participants are now awaiting US and Canadian jobs data for August, due at 8:30 a.m. EDT on Friday. The labor market figures will be among the final pieces of economic data released ahead of the Federal Reserve and Bank of Canada's next rate decision this month.
Canadian government bond prices were mostly lower across the maturity curve, with longer term bond prices falling. The two-year price slipped 3.5 Canadian cent to yield 0.434 percent and the benchmark 10-year rose 8 Canadian cent to yield 1.463 percent.
The Canada-US two-year bond spread narrowed to -26.6 basis points, while the 10-year spread narrowed to -69.9 basis points.
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