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

Fri Dec 21, 2012 9:42am EST
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By Claire Sibonney

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.   Continued...

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