CANADA FX DEBT-C$ slips to 6-month low as inflation cools

Fri Jan 25, 2013 4:26pm EST
 
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* C$ ends at C$1.0065 versus US$, or 99.35 U.S. cents
    * C$ finishes week down 1.5 percent
    * Weakest vs US$ since July, weakest vs euro since Dec 2011
    * Tame inflation data cools rate hike expectations

    By Claire Sibonney
    TORONTO, Jan 25 (Reuters) - Canada's dollar hit its weakest
in six months against the greenback on Friday and lagged most of
the major currencies as a limp December inflation report
reinforced how little pressure there is on the Bank of Canada to
raise interest rates.
    Canada's annual inflation rate was stuck at a three-year low
of 0.8 percent in December, far below the central bank's target
and market expectations. 
    "CPI has weakened the loonie, just to add on what the Bank
of Canada did earlier in the week, and reinforces the message
that the bank really is going nowhere fast and there really
shouldn't be any expectations that they're going to move rates
higher, definitely not this year," said Benjamin Reitzes, senior
economist and foreign exchange strategist at BMO Capital
Markets.
    Most of Canada's primary dealers now expect the Bank of
Canada to hold off raising interest rates until 2014. 
    The currency was down 1.5 percent this week, its worst
weekly performance since May, as it shrugs off supportive signs
in commodity and equity markets.
    "The Canadian dollar is not in a very good space at all,"
said Shaun Osborne, chief currency strategist at TD Securities.
    The Canadian dollar ended the North American
session at C$1.0065 versus its U.S. counterpart, or 99.35 U.S.
cents, down from Thursday's close at C$1.0029, or 99.71 U.S.
cents.
    Earlier, the currency weakened as far as C$1.0101, or 99.00
U.S. cents, its softest level since July 27.
    Next week, the next piece of important domestic data will be
November growth figures due on Thursday.
    Scotiabank chief currency strategist Camilla Sutton said the
Canadian dollar's break through November lows on Friday
positions the currency in a weaker range but that it would be
difficult to meaningfully break through C$1.01.
    "I would suggest it's probably more likely that we see some
resistance at the psychological C$1.01 level before we get into
some of these summer levels," she said, which range between
C$1.02 and C$1.04.
    
    SLIDING VS EURO AS WELL
    The Canadian currency has fared particularly poorly against
the euro since the Bank of Canada news, falling to
its weakest in more than a year, as the euro benefits from
strong German data and banks paying back a larger chunk of ECB
crisis loans than expected. 
    TD's Osborne also said that recent selling of the Canadian
currency was exaggerated, especially given North American equity
markets are hitting their highest levels in years and Canadian
two-year debt maintains a roughly 90 basis-point spread over its
U.S. equivalent.
    "Those correlations seem to be breaking down at the moment,"
he said.
    Canadian bond prices eased across the curve as global
equities rose but outperformed U.S. Treasuries. 
    The price of a two-year bond, which is especially
influenced by near-term interest rate expectations, was off 1
Canadian cent to yield 1.130 percent, while the benchmark
10-year bond fell 44 Canadian cents to yield 1.938
percent.