A survey of US consumer confidence by the University of Michigan showed sentiment fell to its lowest level since 1980, spooking investors, but a stronger-than-expected gain in retail sales excluding autos helped Wall Street stocks regain ground.
"We weakened off after the Michigan number came out, it was quite a bit weaker than expected, and the Canadian dollar saw its weakest levels of the day. But then equities turned around and the S&P and Dow went positive, and that's why the Canadian dollar strengthened," said David Bradley, director of foreign exchange trading at Scotia Capital.
The Canadian dollar often moves in tandem with riskier assets like stocks and commodities. Toronto stocks made moderate gains on Friday in an advance led by energy and financial shares.
At 12:51 p.m. (1651 GMT), the Canadian dollar was at C$0.9895 to the US dollar, or $1.0106, slightly below C$0.9883 to the US dollar, or $1.0118, at Thursday's close.
The Canadian currency had briefly weakened to C$0.9920 to the US dollar, or $1.0081, after the US economic data. That was still well off the week's lows above parity of C$1.0010 to the US dollar.
Bradley said he expected a quiet afternoon of trading as investors took stock of a wild week.
"We've seen a lot of 400-point swings in the Dow this week and a lot of people are beat up and exhausted, and looking forward to the weekend."
With investors moving back into riskier assets, bond prices were mostly lower. Canada's two-year bond was off 6 Canadian cents to yield 0.941 percent, while the 10-year bond was down 15 Canadian cents to yield 2.475 percent.
Canadian bonds underperformed US Treasuries, which were supported by the dismal data there.
Bonds fell even though more Canadian banks, which only last month expected the Bank of Canada to resume tightening this fall, pushed rate hike forecasts into next year.
Canadian overnight index swaps, which are based on expectations for the Bank of Canada's key policy rate, have largely priced a 25-basis-point rate cut by year-end. However, the odds have been pared back in recent sessions as stocks rallied.
"I don't think the market pricing is wildly unreasonable. There is a far outside risk that the bank could cut in a real emergency whereas it's very tough to see them raising rates," said Doug Porter, deputy chief economist at BMO Capital Markets.
Porter said the Bank of Canada will likely remain on the sidelines until the second quarter next year, and then raise once per quarter in 2012.
RBC Capital Markets said late on Thursday in a report that based on current conditions, the priced-in rate cuts appear "wholly unjustified." It also forecast the Bank of Canada will delay its first rate hike until the second quarter of 2012.
Copyright Reuters, 2011