CANADA FX DEBT-C$ hits 3-week low as soft inflation revives rate cut threat
(Adds broker comment, updates prices to close) * Canadian dollar settles at $1.3497, or 74.09 U.S. cents * Bond prices mostly lower across the yield curve By Alastair Sharp TORONTO, Dec 22 (Reuters) - The Canadian dollar tumbled to a three-week low against its U.S. counterpart on Thursday, pressured by domestic inflation data that reminded the market of the risk of further interest rate cuts from the Bank of Canada. Canada's annual inflation slowed in November to 1.2 percent from a rate of 1.5 percent in October, Statistics Canada said. Forecasts had put the rate at 1.4 percent. "That Canadian inflation data miss clearly gave another shot in the arm to dollar-Canada and it forced us through C$1.35," said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets. The Canadian dollar ended the day at C$1.3497 to the greenback, or 74.09 U.S. cents, weaker than Thursday's close of C$1.3407, or 74.59 U.S. cents. "To the extent that a (Bank of Canada interest) rate cut was discussed in October, I don't think today's numbers rule that out," said Desjardins Senior Economist Jimmy Jean. The last interest move by Canada's central bank was a cut in July 2015, while the U.S. Federal Reserve raised rates earlier this month and signaled a faster pace of increases in 2017. That policy divergence has widened the spread between Canada's bond yields and U.S. Treasuries, and has weighed on the loonie. The currency's strongest level of the session was C$1.3414, while it touched its weakest since Nov. 28 at C$1.3520. Notwithstanding likely choppy and low-volume trade into year-end, BMO's Schruder said the currency could come under further pressure. "I wouldn't be shocked to see, in the early part of January, a 'sell North America' trade going on," Schruder said, as investors pull back on bets that U.S. President-elect Donald Trump's plans for deregulation and infrastructure spending will quickly boost the economy. U.S. stocks have rallied since the Nov. 8 election, with the Dow up 9 percent and the S&P 500 gaining 6 percent. Trump, who has vowed to renegotiate the North American Free Trade Agreement with Canada and Mexico, named an economist who has urged a hard line on trade with China to head a newly formed trade council, his transition team said on Wednesday. Economists worry that trade uncertainty will derail an expected pickup in Canadian business spending. Canadian government bond prices were mostly lower across the yield curve, although the two-year rose half a Canadian cent to yield 0.829 percent. The benchmark 10-year declined 14 Canadian cents to yield 1.820 percent. Canada's gross domestic product data for October is due on Friday. (Additional reporting by Fergal Smith; Editing by Jonathan Oatis)
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