By Fergal Smith
TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday, giving up this week's gains after domestic data showing a surprise decline in retail sales revived bets that the Bank of Canada would cut interest rates next year.
Canadian retail sales were down 1.2% in October from September at C$50.92 billion, on weaker sales at motor vehicle and parts dealers, as well as building material and garden equipment supplies dealers, Statistics Canada said. Analysts had forecast a 0.5% increase.
"With the exception of housing markets, Canadian economic releases in the past few weeks have been unambiguously negative," Omar Abdelrahman, an economist at TD Economics, said in a note. "This one is no different. As a result, we are expecting a continued tepid performance for the Canadian economy in the fourth quarter."
Chances of a rate cut over the coming year, which had dwindled in recent weeks, jumped to nearly 50% from about 25% before the data, the overnight index swaps market indicated.
Separate data showed that new-home prices fell 0.1% in November after rising 0.1% in October.
At 9:39 a.m. (1439 GMT), the Canadian dollar was trading 0.3% lower at 1.3164 to the greenback, or 75.96 U.S. cents. The currency traded in a range of 1.3123 to 1.3181.
For the week, the loonie was on track to be little changed. On Wednesday, it notched a seven-week high at 1.3103, supported by data showing a pick-up in Canadian underlying inflation and a trade deal between the United States and China.
Canada is a major exporter of commodities, including oil, so its economy could benefit from an improved outlook for global trade.
The price of oil was set on Friday for a third straight weekly gain after easing U.S.-China trade tensions lifted business confidence and the outlook for global economic growth.
Canadian government bond prices were higher across the yield curve, with the two-year (CA2YT=RR) up 6 Canadian cents to yield 1.665% and the 10-year (CA10YT=RR) rising 21 Canadian cents to yield 1.637%.
The gap between Canada's 10-year yield and its U.S. counterpart widened by 4.6 basis points to a spread of 29.3 basis points in favor of the U.S. bond.