C$ gains despite GDP miss as US bond yields ease

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar rose against its U.S. counterpart on Friday as a drop in U.S. bond yields offset increased bets the Bank of Canada would begin cutting interest rates next week following the release of weaker-than-expected Canadian GDP data.

The loonie was 0.3% higher at 1.3640 to the U.S. dollar, or 73.31 U.S. cents, after trading in a range of 1.3620 to 1.3689. For the week, the currency was up 0.2%.

"The CAD is holding a minor gain on a soft-looking USD on the week," Shaun Osborne, chief currency strategist at Scotiabank, said in a note.

The "saving grace" for the currency on Friday was weaker than expected U.S. personal spending data that weighed on U.S. yields and the greenback, Osborne said.

The U.S. dollar and Treasury yields fell as data showed U.S. inflation tracked sideways in April and consumer spending weakened.

The Canadian economy expanded at a slower-than-expected annualized rate of 1.7% in the first quarter, while the pace of fourth-quarter growth was revised to 0.1% from 1.0% reported initially.

Chances that the BoC would lower its benchmark interest rate from the current level of 5% at a policy decision on June 5 climbed to 80% from 66% before the GDP report, swaps market data showed.

Failure to cut would risk the bank "keeping policy overly restrictive and having to embark on a much more aggressive easing cycle into year-end," said Simon Harvey, Head of FX analysis for Monex Europe and Monex Canada.

"A more dovish outlook for Canadian rates reinforces our bearish stance on CAD," Harvey added.

Canadian bond yields fell across the curve. The 10-year was down 7.1 basis points at 3.631%, extending its pullback from a four-week high of 3.783% that it hit during Thursday's session.

(Reporting by Fergal Smith; Editing by Kirsten Donovan)