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CANADA FX DEBT-C$ hits 5-month low on potential threat to North American trade

Fergal Smith


* Loonie falls 0.3% against the greenback

* Canadian GDP grows by 0.4% annualized in the first quarter

* Price of U.S. oil decreases 2.5%

* Canada's 10-year yield hits a near two-year low

TORONTO, May 31 (Reuters) - The Canadian dollar weakened to a five-month low against the greenback on Friday, as potential U.S. tariffs on Mexico threatened a new North American trade deal and as data showed barely any growth for the domestic economy in the first quarter.

At 9:21 a.m. (1321 GMT), the Canadian dollar was

trading 0.3% lower at 1.3540 to the greenback, or 73.86 U.S. cents. The currency, which was on track to fall for the fourth straight month, touched its weakest level since Jan. 3 at 1.3565.

Global stocks fell as investors feared that U.S.

President Donald Trump's shock threat of tariffs on Mexico could risk pushing the world's largest economy into a recession.

Canada, the United States and Mexico have signed a new trade agreement, known as the United States-Mexico-Canada Agreement (USMCA), but the deal has yet to be ratified by any of the three countries. The tariffs would raise "serious doubts about Mexico ratifying the USMCA," said Sal Guatieri, senior economist at BMO Capital Markets in a note. The Bank of Canada has worried that trade conflicts will hurt economic prospects. Chances of an interest rate cut this year climbed to 60% from about 40% on Thursday, overnight index swaps data indicated. The Canadian economy expanded at an annualized rate of just 0.4% in the first quarter, slightly worse than expected, although monthly growth in March was the highest in almost a year, Statistics Canada said. The price of oil, one of Canada's major exports, was on track for its biggest monthly drop in six months as increased trade tensions weighed on the demand outlook. U.S. crude oil

futures were down 2.5% at $55.19 a barrel.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year rose 7 Canadian cents to yield 1.486% and the 10-year climbed 40 Canadian cents to yield 1.510%. The 10-year yield touched its lowest intraday since June 2017 at 1.488%.

(Reporting by Fergal Smith Editing by Susan Thomas)