C$ softens on the week, but avoids C$1.10

By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday but staved off a breach of C$1.10 as the divergent paths of the two countries' recent economic data and monetary policy outlooks force investors to reassess the loonie's value.

The currency slipped 0.7 percent, or three-quarters of a cent, on the week to hit a four-year low against the greenback and has failed to gain ground on most other major currencies after falling 2.5 percent last week.

Traders will have another chance to test the psychologically important C$1.10 level next week when the Bank of Canada holds a policy-setting meeting mid-week that is book-ended by significant data reports. It traded as weak as C$1.0992 on Wednesday.

"Our view is that you are going to have something fairly dovish from the bank, but they are not going to change their growth outlook for Canada," said Mark Chandler, Royal Bank of Canada's head of Canadian fixed income and currency strategy.

The central bank, which has held its key rate at 1 percent since 2010, cut its 2014 growth projections to 2.3 percent in October at the same time it dropped its rate-hike bias.

The loonie, as Canada's currency is colloquially known, has weakened sharply recently as a string of dismal data points cast a pessimistic pall on the country's economic outlook.

Exacerbating the fall, the more dovish tone from Canada's central bank has contrasted sharply with the more hawkish tilt from the Federal Reserve, which has been emboldened by robust U.S. economic data.

U.S. industrial and housing data on Friday helped support the view the world's largest economy is improving enough to keep the Fed's stimulus reduction on track.

The Canadian dollar ended the North American trading session changing hands at C$1.0976 to the greenback, or 91.11 U.S. cents, weaker than Thursday's close of C$1.0925, or 91.53 U.S. cents. It ended last week at C$1.0901.

Canadian manufacturing sales and wholesale trade data is due on Tuesday, with retail sales numbers out on Thursday and an inflation metric expected on Friday.

Brad Schruder, director of foreign exchange sales at BMO Capital Markets, said opinion on the likely direction of the currency pair depended on whether an observer believes the level of optimism about the U.S. economy and the pessimism about Canada are justified.

"The reality is it is too soon to tell," he said. "The market has not found equilibrium in dollar/Canada, and as long as it does not do that, the risk is higher, not lower."

Canadian government bond prices were higher across the maturity curve, with the two-year up 3 and a half Canadian cents to yield 1.025 percent and the benchmark 10-year up 19 Canadian cents to yield 2.504 percent.

(Editing by Lisa Von Ahn and James Dalgleish)