Canadian dollar weakens as soft data supports rate cut bets

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday as domestic data showed a surprise decline in retail sales, bolstering expectations the Bank of Canada would begin cutting interest rates in the coming months.

Canadian retail sales decreased 0.1% in February, led by a drop in sales at gasoline stations and fuel vendors. It was the second consecutive month of declining sales and compared with expectations for an increase of 0.1%.

Preliminary estimates for March showed that retail sales were flat and manufacturing sales declined 2.8%.

"It does support the prevailing view right now that the Bank of Canada is getting closer and closer to easing rates," said Bipan Rai, global head of FX strategy at CIBC Capital Markets.

"As the divergence with the U.S. comes into sharp relief, there could be some additional upside for dollar-Canada," he said.

Money markets are betting that the Canadian central bank will begin easing interest rates before the Federal Reserve, with the first cut coming in June or July.

The Canadian dollar was trading 0.3% lower at 1.37 to the U.S. dollar, or 72.99 U.S. cents, after moving in a range of 1.3656 to 1.3728.

The decline for the loonie followed five straight days of gains, and came as the U.S. dollar advanced against a basket of major currencies and the price of oil, one of Canada's major exports, settled 0.7% lower at $82.81 a barrel.

Canadian government bond yields moved higher across a steeper curve, tracking moves in U.S. Treasuries. The 10-year was up 4.7 basis points at 3.807%, after earlier touching its highest level since Nov. 14 at 3.834%.

(Reporting by Fergal Smith; Editing by Leslie Adler)