Canadian dollar pulls back from two-week high ahead of trade data

By Fergal Smith

TORONTO (Reuters) -The Canadian dollar weakened against its U.S. counterpart on Tuesday as concern rose about Canada's third wave of the COVID-19 pandemic and investors awaited domestic economic data that could offer clues on the Bank of Canada's policy outlook.

The loonie was trading 0.4% lower at 1.2573 to the greenback, or 79.54 U.S. cents, having pulled back from its strongest level since March 22 on Monday at 1.2497.

Canada's trade report for February is due on Wednesday, while the March employment report is due on Friday.

"Our expectation is for a little bit stronger CAD on the back of some positive data," said Kyle Dahms, economist at National Bank of Canada.

He expects Canada's current account balance to turn positive over the coming months, helped by higher commodity prices, and that the Bank of Canada will cut its bond purchases when it makes its next interest rate announcement on April 21.

Such a move would put the Canadian central bank at odds with some peers, including the Federal Reserve and the European Central Bank, which have said they will maintain or even increase the pace of bond-buying.

The IMF raised its 2021 growth forecast for Canada by 1.4 percentage points to 5%, the biggest upgrade among G7 economies, while strong economic data from China and the United States helped to lift the price of oil, one of Canada's major exports. U.S. crude prices settled 1.2% higher at $59.33 a barrel.

Still, Canada's hospitalizations are surging as a third wave of the pandemic sweeps across much of the country, Prime Minister Justin Trudeau said.

Canadian government bond yields were lower across a flatter curve in tandem with U.S. Treasuries. The 10-year touched its lowest level since March 29 at 1.485% before edging up to 1.490%, down 6.5 basis points on the day.

(Reporting by Fergal SmithEditing by Paul Simao and Jonathan Oatis)