CANADA FX DEBT-C$ slips vs US$ after CPI; hits record vs euro

Fri Jul 20, 2012 4:30pm EDT
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* C$ ends down at C$1.0127 vs US$, or 98.75 U.S. cents
    * C$ ends week 0.2 percent firmer vs US$
    * Canada June inflation weaker than expected
    * C$ rallies to high against euro
    * Bond prices rally across curve

    By Claire Sibonney
    TORONTO, July 20 (Reuters) - The Canadian dollar eased
against its U.S. counterpart on Friday, snapping three days of
gains 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 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. 
    "The market was surprised a little bit by how soft the CPI
data was given how (Governor Mark) Carney was speaking quite
hawkishly in the MPR (Monetary Policy Report) earlier on in the
week," said Dave Bradley, director of foreign exchange trading
at Scotiabank.
    Following the data, a Reuters poll showed most Canadian
primary dealers expect the Bank of Canada to hold interest rates
steady until mid-2013 or later, even after Carney made clear
this week the central bank is still weighing the idea of rate
    The Bank of Canada held its benchmark interest rate at 1
percent but made clear it was still considering 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. 
    "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.
    The Canadian dollar ended the North American session at
C$1.0127 against the U.S. dollar or 98.75 U.S. cents, down from
Thursday's North American session close at C$1.0078, or 99.23
U.S. cents. It ended the week 0.2 percent stronger.
    Scotiabank's Bradley noted that the Canadian dollar was
trading in a narrow range, but after falling back below the
200-day moving average, there would be significant buying
interest for the domestic currency between C$1.0130-C$1.0150.
    "But Canada is going to continue to outperform I think on
the crosses," he said.
    Negative global sentiment also weighed on the domestic
currency on Friday, which tracked world stocks and commodity
prices lower after Spain's heavily indebted Valencia region
asked for financial aid, increasing investor fears that the
Spanish government will seek a full-blown bailout. 
    Against the euro, the Canadian dollar hit an
all-time high at C $1.22 86, or 81.3 9 e uro cents, following a
recent string of record peaks. 
    Canadian bond prices climbed following the disappointing
inflation figures, outperforming U.S. Treasuries on the
interest-rate-sensitive short end of the curve.
    The two-year government bond was up 5 Canadian
cents to yield 0.960, while the benchmark 10-year bond
 climbed 39 Canadian cents to yield 1.616 percent.