Canadian dollar ends down with oil; bonds rise
* Canadian dollar win streak halted at 2 sessions
* Influential Canadian data due next week
* Bonds rally on concerns about economic growth
By Frank Pingue
TORONTO, Aug 14 (Reuters) - The Canadian dollar handed back early gains to close modestly lower against the U.S. dollar for the first time in three sessions on Thursday due to weaker oil prices and data that showed signs of higher U.S. inflation.
Domestic bond prices, lacking any key Canadian economic data for direction, rose alongside the U.S. Treasury market as nagging concerns about global growth kept investors hungry for secure assets like government debt.
The Canadian dollar closed at C$1.0633 to the U.S. dollar, or 94.05 U.S. cents, down from C$1.0625 to the U.S. dollar, or 94.12 U.S. cents, at Wednesday's close.
Early in the session, the currency rallied to C$1.0564 to the U.S. dollar, or 94.66 U.S. cents, but then trickled lower after a higher than expected reading on U.S. consumer price inflation boosted the greenback.
Since Canada is a key oil exporter, the slide in crude prices was another drag for the currency, which tumbled earlier this week to its lowest level in nearly a year. September crude futures closed at $115.01 a barrel in New York.
"We've seen quite a bit of a chop in oil prices over the last little while and the renewed selloff today has dragged the commodity (currencies) down this afternoon," said Shaun Osborne, a strategist at TD Securities.
Osborne now expects the Canadian dollar, which soared 17.5 percent in 2007 to more than US$1.10, will fall to C$1.1490 to the U.S. dollar, or 87 U.S. cents, by the second half of 2009.
Domestic manufacturing sales data is due on Friday, but the economic calendar will draw greater attention next week with the June wholesale trade report on Tuesday, June retail sales data on Wednesday and the July consumer price index release on Thursday.
These reports should give market participants some insight into the Bank of Canada's upcoming interest rate decisions. Its last three policy announcement dates this year are Sept. 3, Oct. 21 and Dec 9.
Market players have reversed some of the more aggressive bets for interest rate cuts by the Bank of Canada, HSBC Canada economist Stewart Hall said in a note on Thursday. Chances for a rate cut have been pared back to a one-in-four probability over the course of the week, Hall said.
BOND PRICES RISE
Overseas data did little to ease concerns about global growth, providing a lift for bond prices.
The European Union's Eurosat office estimated on Thursday that the 15-nation euro zone economy shrank by 0.2 percent in the second quarter, with the economies of heavyweights France and Germany falling 0.3 percent and 0.5 percent, respectively.
Even the bigger than expected 0.3 percent rise in U.S. core consumer price index was not enough to spoil the bond rally.
"I think the bond market looked through that completely," said Michael Gregory, senior economist at BMO Capital Markets.
"Not only is headline inflation going to come down, but the reason core (inflation) was a surprise was because of areas that will probably get heavily discounted as consumer spending slows."
The two-year bond rose 1 Canadian cent to C$101.68 to yield 2.777 percent. The 10-year bond climbed 19 Canadian cents to C$105.34 to yield 3.597 percent.
The yield spread between the two-year and 10-year bond was 82 basis points, down from 83.5 basis points at the previous close.
The 30-year bond added 36 Canadian cents to C$116.66 for a yield of 4.017 percent. In the United States, the 30-year treasury yielded 4.524 percent.
The three-month when-issued T-bill yielded 2.52 percent, up from 2.49 percent at the previous close.
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