July 16, 2008 / 9:16 PM / 9 years ago

Canada dollar flat in lackluster trade, bonds fall

4 Min Read

* Canadian dollar closes flat against greenback

* Bank of Canada Monetary Policy Report Update in focus

* Bond prices fall on rise in stocks, U.S. inflation

By John McCrank

TORONTO, July 16 (Reuters) - The Canadian dollar was flat against the U.S. dollar in lackluster trading on Wednesday as investors looked forward to the Bank of Canada's Monetary Policy Report Update on Thursday for more insight into its economic outlook.

Canadian bond prices fell as a rally in the equity markets lessened the safe-haven bid for government debt.

The Canadian unit closed at C$1.0022 to the U.S. dollar, or 99.78 U.S. cents, barely up from C$1.0023 to the U.S. dollar, or 99.77 U.S. cents, at Tuesday's close.

The currency stayed within a narrow range of 99.97 Canadian cents and C$1.0020, with no real impetus to give it direction.

"It's been fairly muted overall, but I think what's encouraging is that yesterday, when we saw the U.S. dollar pare back some of its losses against other currencies, it didn't really do so against the Canadian dollar," said Gareth Sylvester, currency strategist at HIFX Plc in San Francisco.

The Bank of Canada left interest rates steady at 3 percent on Tuesday, as expected, and investors will be looking forward to the central bank's monetary policy update and news conference on Thursday, where it will give more details on where it sees the economy headed.

Sylvester said one of the things he found interesting about the statement that accompanied the Bank of Canada's interest rate announcement on Tuesday was the view that the U.S. slowdown would likely lead to a cooling inflationary pressures.

"Unlike other central banks, Canada doesn't have to walk that tightrope of managing the risks to inflation versus the risks to growth," he said.

However, while core inflation, which strips out volatile segments, like energy and food prices, is expected to remain within the target range of 1 to 3 percent, the central bank said Canadian headline inflation could spike above 4 percent next year for the first time since 2003.

Finance Minster Jim Flaherty refused to comment on inflation at a news conference in Calgary, Alberta, on Wednesday other than to say that the Bank of Canada sees the risks to its inflation outlook as balanced.

Bond Prices Slide

Canadian bond prices fell along with the larger U.S. Treasury market as equity markets rallied, lessening the safe haven bid for government debt.

U.S. Treasury prices lost ground after data showed that U.S. inflation rose to 5 percent year-over-year in June, far above economists expectations.

"The surprise is not that (U.S. inflation is) increasing, it's the extent it's increasing," said Levente Mady, fixed income strategist at MF Global Canada Co. in Vancouver.

"(U.S. Federal Reserve Chairman Ben) Bernanke mentioned in his testimony yesterday and today that inflation is definitely a concern, but on the other hand, that the economy slowing down is just as much a concern."

On the Canadian data front, soaring energy prices, big drivers of inflation, helped drive Canadian manufacturing sales up by a steeper-than-expected 2.7 percent in May, the biggest rise since March 2007.

The two-year bond dipped 1 Canadian cent to C$101.24 to yield 3.064 percent. The 10-year bond slid 22 Canadian cents to C$104.45 to yield 3.707 percent.

The yield spread between the two-year and 10-year bond was 66.2 basis points, up from 61.5 basis points.

The 30-year bond fell 81 Canadian cents to C$114.94 for a yield of 4.111 percent. In the United States, the 30-year treasury yielded 4.468 percent.

The three-month when-issued T-bill yielded 2.28 percent, up from 2.27 percent at the previous close. (Editing by Peter Galloway)

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