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Loonie and U.S. dollar

Adrian Wyld/Adrian Wyld/CP

Canada's dollar hit a 3-1/2 year high against a broadly weaker U.S. currency on Friday, shrugging off uncertainty over next week's federal election and data that showed Canada's economy shrank unexpectedly.

"The fact that the Canadian dollar continues to rally amid a secular decline in the U.S. dollar is of no great surprise," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

"The fact that it was able to withstand a miss on the GDP and ahead of any kind of political uncertainties leading into the election has been more of an indicator of the fundamental support for the currency going forward."

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Canada's gross domestic product slipped 0.2 per cent in February, initially nudging the currency lower and reinforcing expectations the central bank will hold interest rates steady until the second half of this year.

But the currency later firmed to 94.50 cents to the U.S. dollar, or $1.0582 (U.S.), its strongest level since November, 2007, and up from Thursday's North American finish at 95.10 cents (Canadian) to the U.S. dollar.

Some analysts say breaking through that resistance could see the currency target the modern-day high of 90.59 cents, or $1.1039 (U.S.), that it reached in late 2007.

Strong oil prices and positive U.S. equities also lent support, as did sober second thoughts about the GDP miss.

"It doesn't take much away from what's going to be a strong first quarter for the Canadian economy, so any weakness that we see in the Canadian dollar as a result of this number should be relatively short-lived," said David Tulk, chief Canada macro strategist at TD Securities.

Contributing to the volatility was end-of-month positioning and thin volumes due to holidays in Britain and Japan.

Looking ahead, currency traders are keeping a close eye on the coming federal election. The left-leaning New Democrats have closed in on the ruling Conservatives just days before the May 2 vote.

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The unprecedented success of the NDP has forced apathetic markets to sit up and take notice of their platform, fretting about plans to raise corporate taxes, spend more and redo energy policy.

"The only thing I think is going to be market-moving is the election on Monday night. I think the NDP can play a spoiler role in the Canadian dollar rally," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.

"If they are the official opposition then I think people will take some Canadian dollar bets off the table."

Canadian bond prices extended gains across the curve after the GDP data, outperforming U.S. Treasuries.

The two-year bond was up 6 cents (Canadian) to yield 1.704 per cent, while the 10-year bond added 20 cents to yield 3.200 per cent.

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