February 19, 2008 / 2:41 PM / 10 years ago

Canadian dollar falls on key data

TORONTO (Reuters) - The Canadian dollar slipped against the U.S. dollar on Tuesday, following a holiday on Monday, in the wake of key data which supported the view that the Bank of Canada will cut interest rates again when it next meets in March.

Domestic bond prices fell on the data.

At 9:13 a.m., the Canadian dollar was at C$1.0110 to the U.S. dollar, or 98.91 U.S. cents, down from C$1.0075 to the U.S. dollar, or 99.26 U.S. cents, at Friday’s close.

Toronto financial markets were closed Monday for a provincial holiday.

Canada’s annual inflation rate slowed to 2.2 percent in January from 2.4 percent in December as a cut in the federal sales tax and a strong currency lowered prices.

The core inflation rate, which excludes volatile items and guides the Bank of Canada’s monetary policy, fell to 1.4 percent, its lowest since July 2005. The Bank of Canada targets inflation at 2 percent.

Data from Statistics Canada also showed that tumbling auto sales dragged down Canada’s wholesale trade by 2.9 percent in December, more than expected and bringing the value of monthly sales to their lowest since November 2006.

Analysts had expected a decline of just 0.6 percent on average in wholesale activity in December from November.

The commodities-based Canadian dollar had begun to climb against the U.S. dollar prior to the data, but was unable to find any traction.

Adam Cole, currency strategist at RBC Capital Markets in London said it was a bit surprising the Canadian dollar had not performed better against the greenback, which is weaker against most other G10 currencies.

“Oil is back up to six week highs and you’ve got most of the precious metals at record highs, base metals back up to previous highs and Canada is well placed to benefit from most of those moves,” said Cole.

“When the U.S. dollar is trading on expectations for the U.S. economy, the market seems to translate that into expectations for the Canadian economy also,” said Cole.

Canada ships around three quarters of its exports to the United States, and exports make up around 40 percent of the Canadian economy.

On Monday, Bank of Canada Governor Mark Carney repeated in a speech to the British Columbia Chamber of Commerce that “further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term.”

That echoes what the central bank said on January 22 when it lowered its key lending rate by a quarter percentage point for the second straight meeting, bringing it to 4.00 percent.

“Today’s data on inflation certainly dovetailing nicely with the BoC’s well-telegraphed interest in cutting rates,” said Stewart Hall, market strategist at HSBC Canada in a note.

BONDS FALL

Bond prices fell on the inflation numbers, but the drop was limited as the data was within expectations.

“Basically it seems as though it was a green light to allow the BoC to continue doing what it feels is necessary in terms of battling slower growth,” said Max Clarke, economist at IDEAglobal in New York.

The overnight Canadian Libor rate LIBOR01 was 3.9217 percent, up from 3.9083 percent on Friday.

Friday’s CORRA rate CORRA= was 4.0134 percent, up from 3.9793 percent on Thursday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.

The two-year bond fell 8 Canadian cents to C$102.08 to yield 3.034 percent. The 10-year bond slid 32 Canadian cents to C$101.13 to yield 3.853 percent.

The yield spread between the two- and 10-year bond was 81.9 basis points, down from 82.4 points at the previous close.

The 30-year bond lost 55 Canadian cents to C$112.95 to yield 4.224 percent. In the United States, the 30-year treasury yielded 4.651 percent.

The three-month when-issued T-bill yielded 3.25 percent, unchanged from the previous close.

Editing by Bernadette Baum

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