(Adds strategist quote, details on market activity; updates prices)
* Canadian dollar at C$1.2883, or 77.62 U.S. cents
* Loonie heads for 2.3 percent decline in first quarter
* Canada's gross domestic product dips 0.1 percent in January
* Bond prices higher across the yield curve
TORONTO, March 29 (Reuters) - The Canadian dollar rose against its U.S. counterpart on Thursday as firmer stock prices and optimism about a North American Free Trade Agreement (NAFTA) trade deal offset data showing the domestic economy unexpectedly contracted at the start of the year.
At 4 p.m. EDT (2000 GMT), the Canadian dollar was
trading 0.3 percent higher at C$1.2883 to the greenback, or 77.62 U.S. cents. The currency's strongest level of the session was C$1.2862, while it touched its weakest since Friday at C$1.2940. For the quarter, the loonie was headed for a 2.3 percent decline, which would be its deepest since the final quarter of 2016. The Canadian economy shrank by 0.1 percent in January, short of analysts' estimates for a 0.1 percent increase, in a clear sign that first-quarter growth is likely to be weaker than the Bank of Canada had predicted. "I think the Canadian dollar really hasn't reflected a lot of the weakness (in the economic data), said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. "I think, in part, because it has some favorable push from NAFTA and getting excluded from the tariff actions." U.S. Trade Representative Robert Lighthizer on Wednesday expressed optimism that talks to modify NAFTA could be wrapped up quickly, but a top Canadian official was more downbeat, saying much work remained. Wall Street surged, bringing an upbeat end to a tumultuous, holiday-shortened week as technology stocks rebounded.
Canada's commodity-linked currency tends be sensitive to stock market performance due to the signal it sends about the strength of the global economy. The price of oil, one of Canada's major exports, rose as stocks rallied and as market participants weighed a rise in U.S. crude inventories and production against continued supply curbs
U.S. crude oil futures settled 1.1 percent higher at
$70.27 a barrel. Canadian government bond prices were higher across the yield
curve, with the two-year up 5.5 Canadian cents to yield 1.776 percent and the 10-year rising 24
Canadian cents to yield 2.092 percent. The gap between the 2-year yield and its U.S. equivalent widened by 1.4 basis points to a spread of -49.4 basis points. Canada's bond market will be closed on Friday for Good Friday.
(Reporting by Fergal Smith; Editing by Richard Chang)