C$ weakens as rates seen on hold, inflation tame

Fri Nov 22, 2013 4:53pm EST
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By Leah Schnurr

TORONTO (Reuters) - The Canadian dollar weakened slightly against the greenback on Friday as data showed the annual inflation rate fell to a five-month low in October, reinforcing the market view that Canadian interest rates will remain on hold for some time.

Lower gasoline prices helped push the inflation rate down to 0.7 percent last month, weaker than the 0.9 percent economists' had expected.

The figures highlighted how little pressure there is on the Bank of Canada to raise rates. The central bank has kept rates at 1 percent since September 2010 and recently, in a major policy shift, dropped any mention of an eventual rate rise.

Core inflation, which strips out volatile items and is closely watched by the Bank of Canada, was in line with expectations, dipping to 1.2 percent from 1.3 percent.

Although the Canadian dollar subsequently trimmed losses following the release of the inflation data and a separate report that showed retail sales rose more than expected in September, it was under heavy pressure for a second day.

It dropped on Thursday following remarks by Bank of Canada Governor Stephen Poloz, who said the bank's economic analysis differs from that of the Organization of Economic Cooperation and Development (OECD), which recommended that Canada start raising interest rates as soon as 2014.

"It's part of the more recent trend that has emerged since yesterday of a weaker Canadian dollar, and perhaps that's stemming from the view that some participants may think the bank could resort to a lower rate," said Mazen Issa, macro strategist at TD Securities in Toronto.

"In our opinion, it reinforces the view that the bank's going to be very much on the sidelines and stay very dovish with regards to the outlook, but we see a rate cut as a low probability."   Continued...