CANADA FX DEBT-C$ weakens to 7-month low as data fuels rate cut bets
* Canadian dollar at C$1.3335, or 74.99 U.S. cents * Loonie touches its weakest since March 16 at C$1.3351 * Bond prices higher across the yield curve * Canada-U.S. 2-year spread hits widest in 4 months By Fergal Smith TORONTO, Oct 21 (Reuters) - The Canadian dollar weakened to a seven-month low against its firmer U.S. counterpart on Friday as weaker-than-expected domestic data fueled interest rate cut bets and oil prices fell. The value of Canadian retail sales unexpectedly declined 0.1 percent in August, data from Statistics Canada showed. Analysts had expected a gain of 0.3 percent. Canada's annual inflation rose in September to 1.3 percent from a rate of 1.1 percent in August, but fell short of the 1.5 percent advance analysts had forecast. "The big surprise this week was the Bank of Canada contention that they actively talked about cutting rates. This (data) is just going to keep the flames alive on that talk," said Doug Porter, chief economist at BMO Capital Markets. The implied probability of a Bank of Canada interest rate cut by mid-2017 jumped to more than 40 percent from around 30 percent before the data, overnight index swaps data showed. Canada's central bank head whipsawed markets on Wednesday when he mused about considering a rate cut shortly after holding rates steady. But the element of surprise is one of the few tools left to move the currency where the bank needs it to be - a little weaker to help Canadian exports. U.S. crude prices were down 0.49 percent to $50.38 a barrel as gains for the U.S. dollar against a basket of major currencies offset Russia reiterating its commitment to joining a producers' output freeze. Oil is one of Canada's major exports. At 9:18 a.m. EDT (1318 GMT), the Canadian dollar was trading at C$1.3335 to the greenback, or 74.99 U.S. cents, much weaker than Thursday's close of C$1.3222, or 75.63 U.S. cents. The currency's strongest level of the session was C$1.3226, while it touched its weakest since March 16 at C$1.3351. Canada's trade minister and a European Union negotiator held urgent talks with the premier of the Belgian region of Wallonia to try to break a deadlock preventing EU nations signing an EU-Canadian free trade deal. Canadian government bond prices were higher across the yield curve, with the two-year price up 8 Canadian cents to yield 0.512 percent and the benchmark 10-year rising 37 Canadian cents to yield 1.134 percent. The 2-year yield fell 4.6 basis points further below its U.S. equivalent, to leave a spread of -31.8 basis points, its widest since June 2, indicating outperformance for Canadian government bonds. (Reporting by Fergal Smith; Editing by Meredith Mazzilli)
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