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Canadian dollar falls slightly as US$ rallies

By Cameron French

TORONTO (Reuters) - The Canadian dollar finished slightly lower against the U.S. currency on Friday, falling initially on strong U.S. jobs data, but then paring its losses as traders bet on continued support from strong energy prices and interest rate increases.

Domestic bond prices were mixed, as short-dated debt eased, while long-dated bonds followed U.S. treasuries higher.

The currency finished at C$1.1452 to the U.S. dollar, or 87.32 U.S. cents, down a bit from C$1.1445 to the U.S. dollar, or 87.37 U.S. cents, at Thursday's close.

The U.S. economy added 193,000 jobs in January, a total that was shy of the 240,000 expected by the market, but an upwards revision of the previous five months' numbers sent a charge into the U.S. currency.

"After the payroll data was released, it was more or less U.S. dollar buying across the board, but Canada's reaction was muted when compared with other currencies," said Jack Spitz, director of foreign exchange at National Bank of Canada.

The Canadian dollar initially fell hard, but found strong support at C$1.1502, or 86.94 U.S. cents, and trimmed its losses through the session.

Against overseas currencies, the loonie charged higher alongside the greenback.

For the week, the currency rose 0.4 percent, but finished short of the 14-year high of 87.94 U.S. cents hit on Tuesday.

Analysts said the loonie's refusal to give up ground showed the market is still keen on the currency's strong fundamentals, such as Canada's balanced budget, the currency's strong correlation with energy prices, and the prospect of more Bank of Canada interest rate increases.

"The market remains very bullish on the Canadian dollar and is happy to buy it when they have a reason to, but they don't really want to sell it, despite what they're being told by the market," said David Powell, currency analyst at IDEAglobal.

BONDS MIXED, RISE ON LONG END

Bond prices were mixed, as rate-sensitive short-dated debt continued to price in more interest rate hikes, while longer-dated bonds followed U.S. treasuries higher.

Canada's debt market often follows the lead of its larger U.S. neighbor, particularly when domestic data is thin as it has been this week. Prices eased initially on the U.S. jobs data, but then rose late on strong demand for long-dated U.S. debt.

But there will be plenty of news next week where traders will be able to find inspiration, as the Ivey Purchasing Managers Index will be released on Monday, housing starts will come out on Wednesday, and closely watched trade and jobs data will be released on Friday.

As well, Bank of Canada Governor David Dodge will speak in Barbados on Monday on "Global Imbalances and the Canadian Economy."

The data will be under increased focus over the next couple of months as economists try to determine how much higher the Bank of Canada intends to push its overnight interest rate.

The bank has raised the rate four straight times to 3.50 percent, and most expect at least two more increases. However, a somewhat dovish statement by the bank last week prompted some to doubt whether it will raise the rate more than once.

The bank's next decision date is March 7.

Bond prices and rate expectations generally have a negative correlation.

The two-year bond slipped 2 Canadian cents to C$97.94 to yield 3.937 percent, while the 10-year bond rose 15 Canadian cents to C$102.55 to yield 4.166 percent.

The yield spread between the two-year and 10-year bond moved to 22.9 basis points from 26.2 basis points at the previous close.

The 30-year bond gained 75 Canadian cents to C$114.68 to yield 4.157 percent. The comparable U.S. treasury yielded 4.634 percent.

The three-month when-issued T-bill yielded 3.61 percent, up from 3.60 percent from the previous close.

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