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