CANADA FX DEBT-Canadian dollar pares weekly decline as Fed rate cut bets surge

By Fergal Smith

TORONTO, Aug 1 (Reuters) - The Canadian dollar rebounded from a two-month low against its U.S. counterpart on Friday as weaker-than-expected U.S. jobs data raised expectations for Federal Reserve interest rate cuts, offsetting an escalation in the U.S. trade war with Canada.

The loonie CAD= was trading 0.4% higher at 1.38 per U.S. dollar, or 72.46 U.S. cents, after earlier touching its weakest level since May 22 at 1.3879. For the week, the currency was down 0.7%.

U.S. employment growth slowed more than expected in July while the nonfarm payrolls count for the prior two months was revised down by a massive 258,000, pointing to a deterioration in labor market conditions that puts a September interest rate cut by the Fed back on the table.

"Today’s very poor employment data validates the minority dissent among Fed policymakers (for a rate cut) that emerged this week and will only boost White House criticism of the Fed’s current stance," Shaun Osborne and Eric Theoret, strategists at Scotiabank, said in a note.

"Heightened uncertainty over the Fed policy outlook may cap USD upside risk around the 1.39 area even as tariff risks prevail for Canada."

U.S. President Donald Trump on Thursday signed an executive order increasing tariffs on Canadian goods to 35% from 25% on all products not covered by the U.S.-Mexico-Canada trade agreement, the White House said. About 90% of Canadian exports to the U.S. in May were exempt under the USMCA.

Canada's manufacturing sector contracted for a sixth straight month in July as tariffs undercut trade with the United States and spurred firms to reduce inventory as well as staffing levels.

The price of oil, one of Canada's major exports, fell 2.8% to $67.35 a barrel on jitters about a possible increase in production by OPEC and its allies.

Canadian bond yields moved lower across the curve in a shortened session ahead of a market holiday on Monday, tracking moves in U.S. Treasuries. The 10-year yield CA10YT=RR was down 8.4 basis points at 3.383%, after touching its lowest level since July 9 at 3.372%.