CANADA FX DEBT-C$ strengthens as inflation higher than expected
* Canadian dollar at C$1.1210 or 89.21 U.S. cents * Bond prices mostly higher across the maturity curve (Adds details, quotes, updates prices) By Leah Schnurr TORONTO, March 21 (Reuters) - The Canadian dollar got a reprieve from recent heavy selling and firmed against the greenback on Friday after data showed that inflation was higher than expected last month, while retail sales rebounded in January. Although the annualized inflation rate slowed to 1.1 percent in February from 1.5 percent the previous month, it beat expectations for a 0.9 percent rise in consumer prices. The loonie touched a session high shortly after the data was released as the market saw the number as relieving pressure on the Bank of Canada to cut interest rates. The bank has signaled concern about the weak inflation environment. "Inflation is still low, but at least we've moved into the (central bank's) target range, so that will probably ease some of that discussions of the need for the Bank of Canada to maybe introduce some rate cuts, and with that it should provide a bit of support for the Canadian dollar," said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. Economists had anticipated that a jump in prices in February of last year would skew the yearly comparison. Bank of Canada Governor Stephen Poloz said earlier in the week that he expected lower February inflation because of that base effect. The Canadian dollar was hit hard earlier in the week by comments by Poloz that were more dovish than expected. The comments, in which Poloz left the door open to a potential cut in interest rates, and uncertainty about when the United States might raise rates, helped take the loonie to a 4-1/2 year low on Thursday. "Even though on balance the data released today didn't change the overall story and the medium- and longer-term picture for the Canadian dollar, what it does do is ease some of the selling pressure we've seen the last couple of days with sentiment turning so bearish," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary. "The overall story is we're still in a depressed inflationary environment," Smith said. The currency also got a boost from a strong increase in retail sales in January as the economy shook off some of the weather-related effects that had depressed activity in December. The Canadian dollar ended the North American session at C$1.1210 to the greenback, or 89.21 U.S. cents, stronger than Thursday's close of C$1.1242, or 88.95 U.S. cents. The loonie touched a session high of C$1.1174. For the week, the U.S. dollar appreciated by 1 percent against the loonie. This week's drop took the Canadian dollar below the key C$1.12 area for the first time since late January. "If we attack the C$1.1270 area, that will be the first level of resistance," Smith said. "If we can break that, there's a lot of room to run. If we vault C$1.13, we could potentially be in C$1.14 pretty fast." Investors also took in comments from a number of U.S. Federal Reserve policymakers on Friday, two days after Fed Chair Janet Yellen surprised markets by signaling a potentially faster timetable for raising rates than had been anticipated. St Louis Federal Reserve President James Bullard said Yellen was likely just repeating the views of private analysts and investors when she said the central bank could raise interest rates six months after ending a bond-buying program. Earlier on Friday, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said the Fed should have promised to keep rates near zero until U.S. unemployment falls below 5.5 percent as long as inflation and financial stability risks are contained. Kocherlakota was the sole dissenter to the Fed's policy decision this week, which dropped its promise to keep rates at ultra-low levels until the unemployment rate falls to at least 6.5 percent. Canadian government bond prices were mostly higher across the maturity curve, though the two-year was off half a Canadian cent to yield 1.075 percent. The benchmark 10-year was up 14 Canadian cents to yield 2.485 percent. (Additional reporting by Allison Martell; Editing by Peter Galloway)
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