C$ slips vs. U.S.$ after CPI; hits record vs. euro

Fri Jul 20, 2012 4:34pm EDT
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By Claire Sibonney

TORONTO (Reuters) - The Canadian dollar eased against its U.S. counterpart on Friday, snapping three days of gains after weaker-than-expected domestic inflation data looked unlikely to spur the Bank of Canada to act any time soon on its warning that it could raise interest rates.

The data showed Canada's annual inflation climbed 1.5 percent in June from a two-year low in May, but still well below the Bank of Canada's 2 percent target.

"The market was surprised a little bit by how soft the CPI data was given how (Governor Mark) Carney was speaking quite hawkishly in the MPR (Monetary Policy Report) earlier on in the week," said Dave Bradley, director of foreign exchange trading at Scotiabank.

Following the data, a Reuters poll showed most Canadian primary dealers expect the Bank of Canada to hold interest rates steady until mid-2013 or later, even after Carney made clear this week the central bank is still weighing the idea of rate hikes. <CA/POLL>

The Bank of Canada held its benchmark interest rate at 1 percent but made clear it was still considering an eventual move higher, sending a clear signal to markets that they should not be pricing in a rate cut.

However overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders slightly increased bets on a rate cut in late 2012 after the inflation data.

"Obviously, the market is seeing this as slightly increasing the chances of the (central) bank perhaps easing at some point, or maybe further pushing out the date when the bank will consider raising interest rates," said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian dollar ended the North American session at C$1.0127 against the U.S. dollar or 98.75 U.S. cents, down from Thursday's North American session close at C$1.0078, or 99.23 U.S. cents. It ended the week 0.2 percent stronger.   Continued...