CANADA FX DEBT-C$ slips vs US$ after weak inflation but rallies vs euro

Fri Jul 20, 2012 10:10am EDT
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* C$ slips to C$1.0126 vs US$, or 98.76 U.S. cents
    * Canada June inflation weaker than expected
    * C$ rallies to high against euro
    * Bond prices climb across curve

    By Claire Sibonney
    TORONTO, July 20 (Reuters) - The Canadian dollar dipped to a
session low against its U.S. counterpart on Friday after
weaker-than-expected domestic inflation data looked unlikely to
spur the Bank of Canada to act any time soon on its warning that
it could raise interest rates.
    The Canadian dollar fell to C$1.0126 versus the
greenback, or 98.76 U.S. cents, down from around C$C$1.0108, or
98.93 U.S. cents heading into the report.
    The data showed Canada's annual inflation climbed 1.5
percent in June from a two-year low in May, but still well below
the Bank of Canada's 2 percent target. 
    "Obviously the market is seeing this as slightly increasing
the chances of the (central) bank perhaps easing at some point,
or maybe further pushing out the date when the bank will
consider raising interest rates," said Doug Porter, deputy chief
economist at BMO Capital Markets.
    Earlier this week, the Bank of Canada held its benchmark
interest rate at 1 percent but made clear it was still weighing
an eventual move higher, sending a clear signal to markets that
they should not be pricing in a rate cut. 
    However, overnight index swaps, which trade based on
expectations for the central bank's key policy rate, showed that
traders slightly increased bets on a rate cut in late 2012 after
the inflation data. 
    At 9:47 a.m. (1347 GMT), the Canadian dollar stood at
C$1.0121 against the U.S. dollar or 98.80 U.S. cents, down from
Thursday's North American session close at C$1.0078, or 99.23
U.S. cents. 
    The domestic currency was already on softer ground heading
into the report, tracking global risk-averse sentiment as
Spain's borrowing costs climbed back above their 7 percent pain
threshold after one of its heavily indebted regions called for
    Against the euro, the Canadian dollar hit a record
peak at C$1.2303, or 81.28 euro cents, following a recent string
of highs. 
    Canadian bond prices climbed following the disappointing
inflation figures, outperforming U.S. Treasuries on the short
end of the curve.
    "There's been a bit of a rally across the curve for Canadian
bonds. I think that's maybe just coming off the surprise of the
weakness in the core measure but I wouldn't expect that to
remain," said Mazen Issa, Canada macro strategist at TD
    "We would expect some of that rally to unwind a little but
just given that the global backdrop really becomes now the
primary driver in terms of market sentiment and in this case
fixed income rates."
    The two-year government yield which is especially
sensitive to Bank of Canada interest rate moves, fell to 0.955
percent from 0.967 percent just before the release.