Canadian dollar steadies after 'limited' reaction to GDP miss

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar was little changed against its U.S. counterpart on Tuesday, clawing back earlier losses that were driven by lower oil prices and data showing a surprise contraction of Canada's economy in the second quarter.

The loonie was trading nearly unchanged at 1.2605 to the greenback, or 79.33 U.S. cents, after trading in a range of 1.2569 to 1.2653.

Canada's economy shrank 1.1% in the second quarter and likely had far less momentum than had been expected heading into the summer, data showed. Analysts had expected second-quarter annualized growth of 2.5%.

The data led to "a minor bid in USD-CAD but the limited market reaction was telling", said Simon Harvey, FX market analyst for Monex Europe and Monex Canada.

Investors awaited U.S. job figures later this week for clues on the timing of the Federal Reserve's stimulus taper. The Bank of Canada is due to make an interest rate decision next week.

The GDP data is unlikely to mean much for next week's BoC announcement but could affect the following meeting in October, said Derek Holt, vice president of capital markets economics at Scotiabank.

The central bank is due to update its economic forecasts in October, including its assessment of slack in the economy. It has pledged to keep interest rates on hold until slack is absorbed, which would occur in the second half of 2022 according to its latest forecast.

The data "motivates pushing out the point at which the output gap will close", Holt said.

The price of oil, one of Canada's major exports, settled 1% lower at $68.50 a barrel, with demand for crude expected to drop after Hurricane Ida shuttered U.S. Gulf Coast refineries.

Canada's two-year yield was little changed at 0.426%, while the 10-year rate rose 3.4 basis points to 1.217%.

(Reporting by Fergal Smith; Editing by Steve Orlofsky and Mark Heinrich)