CANADA FX DEBT-C$ shines on inflation data, foreign investment

Thu Feb 18, 2010 4:43pm EST
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 * C$ climbs to 96.02 U.S. cents
 * Canada inflation rate jumps, nears central bank target
 * Bond prices weaken after CPI
 (Updates rates, adds details, quotes)
 By Claire Sibonney
 TORONTO, Feb 18 (Reuters) - Canada's dollar rose to its
highest level in almost a month against the U.S. currency on
Thursday after data showed domestic inflation rose more than
expected and foreigners flocked to purchase Canadian
 Higher gasoline prices pushed Canada's annual inflation
rate to just below the central bank's 2 percent target in
January, encouraging talk about early interest rate hikes.
 "It was good for the currency in the sense that slightly
firmer inflation, if that becomes a trend, would force the Bank
of Canada's hand to begin implementing higher interest rates
sooner than expected and that would in turn be positive for the
Canadian dollar," said Camilla Sutton, a currency strategist at
Scotia Capital.
 As well, data showed foreigners increased their purchases
of Canadian securities in December to C$11.23 billion from
C$10.58 billion in November, wrapping up a record year for
foreign portfolio investments. [ID:nN18180480]
 The data "underlined the continued attractiveness of
Canadian assets for foreign investors at the moment" and
reflected the country's relatively strong fundamentals, said
Shaun Osborne, chief currency strategist at TD Securities.
 Osborne noted that the Canadian dollar outperformed all
other G10 currencies on Thursday, reaching its highest level
against the euro since October 2007 at C$1.4109.
 "The underlying trend clearly seems to be towards Canadian
dollar strength," he said.
 The price of oil, which often influences the Canadian
dollar, shot up over $78 a barrel, supported by a drop in U.S.
distillate inventories. [O/R]
 Investors also piled into gold, which further supported the
commodity-linked currency. [GOL/]
 The Canadian dollar closed at C$1.0414  to the U.S. dollar,
or 96.02 U.S. cents, up from Wednesday's close at C$1.0452, or
95.68 U.S. cents. Earlier, the currency hit C$1.0397 or 96.18
U.S. cents, its highest level in nearly a month.
 Yields on overnight index swaps, which trade based on
expectations for the key rate, edged higher after the Canadian
inflation data, which showed the market saw tightening as
slightly more likely.
 The pricing of the market suggests the rate will be around
0.50 percent in July and 0.75 percent in October. BOCWATCH
 The Bank of Canada has pledged to hold its key interest
rate unchanged at 0.25 percent until the end of June as long as
inflation stays in check.
 Analysts said the inflation figures should smooth out in
the coming months as the base effects of low fuel prices a year
earlier could fall out of the equation by mid-2010.
 Canadian bonds yields were also slightly higher after the
inflation data, with additional pressure from stronger equity
markets and U.S. Treasury prices, which fell after the
government announced a record amount of bonds for its auctions
next week. [US/]
 The two-year Canadian government bond CA2YT=RR was down 4
Canadian cents at C$100.280 to yield 1.359 percent, while the
10-year bond CA10YT=RR fell 16 Canadian cents to C$102.02 to
yield 3.493 percent.
 (Reporting by Claire Sibonney; Editing by Jeffrey Hodgson)