CANADA FX DEBT-C$ weakest since late August after tame CPI

Fri Oct 19, 2012 2:36pm EDT
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* C$ hits C$0.9928 vs US$, or $1.0073
    * Lowest level since Aug. 24
    * Soft Canadian inflation data limits chance of rate rise
    * Currency set for more than 1 pct decline on week

    By Claire Sibonney
    TORONTO, Oct 19 (Reuters) - The Canadian dollar fell to its
weakest level against the U.S. currency in nearly two months on
Friday, hit by soft domestic inflation data and renewed worries
about corporate profits.
    Prices in Canada remained tame in September with inflation
at 1.2 percent, unchanged from August. The absence of inflation
pressure could set the stage for the Bank of Canada to ease its
hawkish bias when it holds its next policy meeting on Tuesday.
    "A lot of traders were readjusting their expectations this
morning," said Mark Frey, chief market strategist at Cambridge
Mercantile Group, in Victoria, British Columbia.
    Higher interest rates tend to help a country's currency
appreciate because they often attract international capital
flows and vice versa.
    Canada's risk-related currency was also vulnerable to the
perceived lack of progress on a Spanish bailout request, which
reminded investors of the headwinds facing the global economy.
    "Today's data aside, the overall macro environment and risk
with respect to equities and commodities is what drives the
Canadian dollar nine days out of 10," added Frey.
    At 2:20 p.m. (1820 GMT) the Canadian dollar was
trading at C$0.9928 to the greenback, or $1.0073, compared with
C$0.9849, or $1.0153, at Thursday's North American close. 
    The currency hit an intraday low of C$0.9939, or $1.0061,
its weakest level since Aug. 24, a day after sliding on a host
of negative factors including softer equity and commodity
    The next significant support levels for the Canadian dollar
were seen around C$0.9960 and parity.
    The Canadian dollar has fallen more than 1 percent this
week, underperforming other major currencies after Bank of
Canada Governor Mark Carney omitted previous language on
possible interest rate hikes in a speech he gave on Monday.
    Carney did say that the central bank would take whatever
action is necessary to keep the 2 percent inflation target and
acknowledged the effect global uncertainty was having on
Canada's resource-linked economy. 
    "The (inflation) report should weigh towards a softer
dollar, given the implications for the Bank of Canada," said Sal
Guatieri, senior economist at BMO Capital Markets.
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the
inflation data traders slightly increased their small bets on a
rate cut in the coming year. 
    A Reuters poll released on Thursday suggested the central
bank will postpone interest rate hikes until the fourth quarter
of next year and will likely water down, rather than eliminate,
its hawkish language. 
    Declines in the price of oil, gold and copper also weighed
on the commodity-linked currency, while a handful of
disappointing U.S. earnings reports added to the pessimistic
    Tech giants Microsoft and Google issued
lackluster earnings on Thursday, while General Electric 
reported revenue early on Friday that fell short of
    Canadian government bond prices rallied on renewed demand
for safe-have assets, mimicking U.S. Treasuries. 
    The rate-sensitive two-year bond outperformed its
U.S. counterpart, rising 9 Canadian cents to yield 1.085. The
benchmark 10-year bond added 16 Canadian cents to
yield 1.894 percent.