CANADA FX DEBT-C$ weakens as Yellen, data boost Fed hike bets

Thu Nov 17, 2016 5:03pm EST
 
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(Adds analyst comment, updates prices to close)
    * Canadian dollar settles at C$1.3507, or 74.04 U.S. cents
    * Loonie had earlier touched strongest since Nov. 10 at
C$1.3400
    * Bond prices lower across the yield curve

    By Alastair Sharp
    TORONTO, Nov 17 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Thursday as strong U.S. economic
data and comments from Federal Reserve Chair Janet Yellen
solidified expectations of a U.S. interest rate hike next month.
    A broadly stronger greenback weighed on oil prices, which
had earlier helped the loonie strengthen to a one-week high on
hopes for an OPEC deal to limit production. 
    Oil is one of Canada's major exports.
    The Canadian dollar settled at C$1.3507 to the
greenback, or 74.04 U.S. cents, weaker than Wednesday's close of
C$1.3441, or 74.40 U.S. cents.
    The U.S. dollar and bond yields have jumped since last
week's presidential election victory by Donald Trump, who has
promised tax cuts and spending that could spark U.S. inflation.
    While the market broadly expects a Fed hike in December, the
Bank of Canada is seen stuck on the sidelines.
    "The Bank of Canada is handcuffed when it comes to raising
interest rates in response to the Fed given the vulnerabilities
in the housing market," said Scott Smith, senior market analyst
at Cambridge Global Payments in Toronto.
    He said the Canadian currency could push up to C$1.37 or
C$1.38 into early 2017 as the market moves to price in a more
aggressive Fed hiking cycle through next year.
    The currency's weakest level of the session was C$1.3522,
while it touched its strongest since Nov. 10 at C$1.3400. On
Monday, the currency touched its weakest in eight months at
C$1.3589.
    Canada's inflation report for October is due on Friday. The
annual inflation rate is forecast to rise to 1.5 percent, closer
to the Bank of Canada's 2 percent target. 
    U.S. consumer prices recorded their biggest increase in six
months in October, helping support the December Fed hike thesis.
 
    The U.S. central bank could raise rates "relatively soon" if
economic data keeps pointing to an improving labor market and
rising inflation, Fed Chair Yellen said. 
    Lending activity to Canadian small businesses slowed
modestly in September, though borrowing picked up for
medium-sized firms, a report showed. 
    Foreign investors bought a net C$11.77 billion in Canadian
securities in September, mainly in new bonds, Statistics Canada
said.    
    Canadian government bond prices were lower across a steeper
yield curve in sympathy with U.S. Treasuries. The two-year
 dipped 3 Canadian cents to yield 0.676 percent, and
the benchmark 10-year fell 50 Canadian cents to
yield 1.561 percent.
    The 10-year yield touched its highest since December on
Wednesday.

 (Additional reporting by Fergal Smith; Editing by W Simon and
James Dalgleish)