CANADA FX DEBT-C$ slumps, bonds rise as soft CPI cools rate talk

Fri Feb 18, 2011 4:55pm EST
 
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 * C$ falls to $1.0142
 * Bonds prices rise across the curve
 * Annual inflation rate 2.3 pct vs 2.4 pct in December
 * Bank of Canada under no pressure to raise rates in March
 By John McCrank
 TORONTO, Feb 18 (Reuters) - Canada's currency fell against
the U.S. dollar on Friday after data showed that the country's
annual inflation rate eased last month, making it less likely
the Bank of Canada will hike rates in the near term.
 Canadian government bond prices ticked higher on the
consumer price index report, diverging from U.S. Treasuries,
which fell on the long end as traders prepared for a new supply
of government debt next week.
 Statistics Canada said the country's inflation rate slipped
to 2.3 percent in January from 2.4 percent in December as
energy price increases eased. The year-on-year core rate, which
is closely watched by the Bank of Canada, slipped to 1.4
percent from 1.5 percent. [ID:nN18254283]
 "Canada was the worst performer of all the primaries (major
currencies) for the day," said Camilla Sutton, chief currency
strategist, at Scotia Capital in Toronto.
 "This morning's inflationary print just highlights that
there really are few inflationary pressures in Canada and to
some degree that's pushed out expectations for an interest rate
hike."
 Canada's dollar initially firmed after the figures to as
high as to C$0.9825 to the U.S. dollar, or $1.0178 -- not far
off the near three-year high of C$0.9816 hit on Thursday.
 But it quickly pared the gains as traders trimmed their
bets on the likelihood of a near-term interest rate hike by the
Bank of Canada, which targets 2 percent core inflation.
 The currency CAD=D4 ended the North American session at
C$0.9860 to the U.S. dollar, or $1.0142, down from Thursday's
North American session close of C$0.9849 to the U.S. dollar, or
$1.0153.
 A Reuters poll showed that none of Canada's 12 primary
security dealers expect the central bank to raise rates at its
March 1 policy-setting announcement, and several have pushed
back rate hike forecasts from a month ago. [CA/POLL]
 "We thought there was a risk of them hiking on March 1 but
I think this (inflation data) removes that risk," said Ryan
Bohren, an economist at Bank of America Merrill Lynch.
 BONDS RISE
 Canadian bond prices were higher across the curve, with the
interest-rate sensitive two-year Canadian government bond
CA2YT=RR up 2 Canadian cents to yield 1.896 percent, while
the 10-year bond CA10YT=RR advanced 15 Canadian cents to
yield 3.466 percent.
 Yields are unlikely to rise much in the near future with
interest rates on hold, said Sal Guatiari, senior economist at
BMO Capital Markets, which is forecasting 2011's first rate
hike in July.
 "We don't expect bond yields to increase dramatically in
the near term, because we think the Bank of Canada will remain
on the sidelines until the summer, but certainly in the second
half of the year, bond yields will trend higher."
 The market's focus now turns to the Group of 20 financial
leaders meeting in Paris, where the world's major economies
were split over how to measure imbalances in the global economy
in a bid to avert future financial crises. [ID:nLDE71D100]
 Next week's key Canadian data comes on Tuesday with the
release of retail sales numbers for December. ECONCA
 (Additional reporting by Ka Yan Ng and Claire Sibonney;
editing by Jeffrey Hodgson)