CANADA FX DEBT-C$ weakens after larger-than-expected trade gap

February 6, 2014

* Canadian dollar at C$1.1114 or 89.77 U.S. cents * Bond prices mixed across the maturity curve By Leah Schnurr TORONTO, Feb 6 (Reuters) - The Canadian dollar weakened against the greenback on Thursday, erasing earlier gains after data showed the country posted a much larger-than-expected trade deficit in December.

Canada's trade deficit widened to C$1.66 billion ($1.49 billion), almost C$1 billion more than economists had expected, and the highest level since November 2012. Last November's gap was also revised to be much larger than originally reported.

Last month's data that showed a similarly larger-than-expected trade deficit for November, coupled with data that showed a contraction in purchasing activity, had sparked a selloff in the loonie in early January that turned out to be the start of the most recent leg down in the currency.

The loonie has regained some ground in recent sessions after hitting a 4-1/2-year low last week. The currency had been trading around session highs heading into Thursday's data, but the disappointing figures sent it lower.

"This is the next in a string of very disappointing trade numbers," said David Tulk, chief Canada macro strategist at TD Securities in Toronto.

"It still speaks to the narrative that the rotation towards net exports for the Canadian economy is still quite elusive and this is despite some hope that the U.S. economy was stronger through the end of last year." The Canadian dollar was at C$1.1114 to the greenback, or 89.77 U.S. cents, weaker than Wednesday's close of C$1.1080, or 90.25 U.S. cents.

Despite the Canadian dollar's tumble in recent months, the Bank of Canada last month noted the currency was still strong and still posed an obstacle to exports.

"It does validate the Bank of Canada's point that despite a stronger U.S. economy, that has yet to really flow through into the Canadian economy. It raises some concern that there's something more than just the price effect at work," said Tulk.

Trade data south of the border also showed the U.S. deficit widened in December, which could see the advance fourth-quarter growth estimate trimmed.

Canadian government bond prices were mixed across the maturity curve, with the two-year up half a Canadian cent to yield 0.976 percent and the benchmark 10-year down 10 Canadian cents to yield 2.404 percent.