Canadian dollar hits new 14-month low as uncertain trade outlook weighs

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday, retaining this week's defensive bias in the face of an uncertain trade outlook, while domestic data showed the economy stalled in February.

The currency's official close, which was published for the last time by the Bank of Canada, was C$1.3650 to the greenback, or 73.26 U.S. cents, weaker than Thursday's close of C$1.3624, or 73.40 U.S. cents.

"It is all about trade, which has been whipping the currency around," said Amo Sahota, director at Klarity FX in San Francisco.

U.S. President Donald Trump told Reuters on Thursday that he had been "psyched" to terminate the North American Free Trade Agreement with Canada and Mexico on Saturday, but then changed his mind after their leaders asked for it to be renegotiated instead. He said he will not hesitate to change course again and pull the plug if the negotiations become "unserious."

The Canadian dollar's strongest level of the session was C$1.3625, while it touched its weakest since February 2016 at C$1.3697. For the week, the loonie fell 1.1 percent and for the month, it was down 2.6 percent.

The underlying trend has been for a weaker Canadian dollar and that has been supported by fundamentals, such as widening yield spreads, Sahota said.

Canada's 2-year yield has fallen this week nearly 8 basis points further below its U.S. equivalent to a spread of -54.9 basis points, nearly its biggest gap since January 2016.

Liquidity issues at a non-bank mortgage lender, unrelated to actual performance, added to pressure on the loonie this week, according to a research note by Avery Shenfeld, at CIBC Capital Markets.

Speculators have increased bearish bets on the Canadian dollar to the most since February 2016, data from the Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions jumped to 42,642 contracts as of April 25 from 33,252 a week earlier.

Canadian gross domestic product was flat in February, matching the forecast by analysts in a Reuters poll, after robust growth in January.

"It is a soft month in an otherwise solid quarter," said Derek Holt, head of capital markets economics at Scotiabank.

U.S. crude oil prices settled 36 cents higher at $49.33 a barrel, rebounding from a one-month low the previous day.

Canadian government bond prices were higher across the yield curve, with the 10-year rising 25.8 Canadian cents to yield 1.546 percent.

(Reporting by Fergal Smith; Editing by Nick Zieminski, Sandra Maler and Jonathan Oatis)