December 21, 2012 / 1:52 PM / 5 years ago

Canadian dollar falls to two-week low as CPI, fiscal cliff bite

A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011.Mark Blinch

TORONTO (Reuters) - The Canadian dollar hit a two-week low against its U.S. counterpart on Friday after data showed Canada's annual inflation rate fell to a three-year low in November, adding to the cheerless mood in markets as U.S. budget talks stalled.

Inflation came in at 0.8 percent, weaker than analysts' expectations and far below the Bank of Canada's 2.0 percent target, which means the central bank is under no pressure to raise interest rates soon.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data traders decreased their already small bets on a rate hike in 2013.

Meanwhile, the Canadian economy eked out only a 0.1 percent gain, indicating a very slow start to the fourth quarter amid foreign and domestic economic woes.

"The CPI was probably the bigger surprise of the two. Combined with renewed concerns over the fiscal cliff, I'd say this combination is negative for the currency, mildly negative," said Doug Porter, deputy chief economist at BMO Capital Markets.

Following the data, the currency touched a session low C$0.9930 versus the greenback, or $1.0070, compared with around C$0.9916, or $1.0085 heading into the reports.

It was the currency's weakest level since December 7.

The Canadian dollar was already on softer ground as growth-related currencies sold off after a Republican proposal for averting the fiscal cliff failed to pass, dissipating hopes that a deal would be reached soon in Washington.

At 9:26 a.m. (1426 GMT), the currency was at C$0.9927, or $1.0074, weaker than Thursday's North American session close at C$0.9873 versus the U.S. dollar, or $1.0129.

"The overwhelming issue affecting markets this week, including today, is the U.S. fiscal cliff negotiations," said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal.

"Here we are on December 21 and besides being the (Mayan calendar) end of the world, it's also very close to Christmas and most people had expected, that by now, there would already have been a deal. So from that perspective, it's a little disappointing."

Republican lawmakers on Thursday delivered a blow to their leader, House of Representatives Speaker John Boehner, when they failed to back a bill designed to extract concessions from President Barack Obama.

That threw into disarray attempts to reach an agreement to avert $600 billion of tax hikes and spending cuts that could push the U.S. economy back into recession next year, and boosted demand for the most liquid government bonds and safe-haven currencies.

Canadian government bond prices added to earlier gains. The two-year bond was up 5 Canadian cents, yielding 1.106 percent, while the benchmark 10-year bond climbed 37 Canadian cents to yield 1.798 percent.

Editing by James Dalgleish

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