CANADA FX DEBT-C$ modestly higher ahead of inflation report

Thu May 19, 2011 5:47pm EDT
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   * C$ edges up to C$0.9682 to the U.S. dollar, or $1.0328
 * Bond prices flat to higher
 * Market expects high inflation for April
 By John McCrank
 TORONTO, May 19 (Reuters) - Canada's dollar edged higher
against a broadly softer U.S. currency on Thursday, ahead of a
key Canadian inflation report.
 The greenback slumped after U.S. data showed weakness in
the economic recovery, causing investors to bet that U.S.
monetary policy could stay ultra-loose into mid-2012, in which
case, interest rate differentials would likely work against the
U.S. currency. [ID:nN19116085]
 The Canadian dollar CAD=D4 ended the North American
session at C$0.9682 to the U.S. dollar, or $1.0328, up
moderately from Wednesday's close at C$0.9706 to the U.S.
dollar, or $1.0303.
 Canada's dollar was actually lagging most other major
currencies when compared with the greenback on Thursday, which
was likely due to weakness in commodity markets, said David
Tulk, chief Canadian macro strategist at TD Securities.
 Canada is a major exporter of commodities such as oil.
 Looking ahead to Friday's domestic data, headline inflation
is expected to have reached a 2-1/2 year high of 3.4 percent in
April on increased gasoline and food prices. [ID:nN13255914]
 Core inflation, which strips out volatile items like
gasoline, is seen easing to 1.6 percent after a sharp jump in
 The figures, along with a report on retail sales for the
month of March, are among the last before the Bank of Canada's
next interest rate decision on May 31.
 While the central bank is expected to leave interest rates
at 1 percent, the inflation data could have an impact on its
next rate decision in July.
 "It's at the back of everyone's mind," said Lorne Gavsie,
managing director, foreign exchange, at BMO Capital Markets.
 "Certainly the comments from (Bank of Canada Governor Mark)
Carney over the past couple of days have everyone focused in on
what we may see tomorrow morning."
 Carney has said inflation would remain above the bank's
target range of 1 to 3 percent in the second quarter, but
suggested that price pressures were temporary. [ID:nN16281097]
 In the United States, the weak data on home sales and
factory activity highlighted the softness in the economic
recovery. [ID:nN19134058] [ID:nN19116085]
 Some central banks have already starting raising interest
rates as their economies pick up after the recession, giving a
boost to their currencies. Canada raised interest rates three
times last year before pausing at 1 percent.
 The unfavorable interest rate differential has been
weighing on the greenback. The Canadian dollar is up 2.7
percent against its U.S. counterpart so far this year, despite
trending lower in recent weeks, while the euro is up 7
 The weak U.S. economic data also helped fuel a safe-haven
bid in U.S. Treasuries, while Canada's bond market ended flat
to higher as the economy was seen on sounder footing, Tulk
 Canada's two-year bond CA2YT=RR was flat, yielding 1.684
percent, while the 10-year bond CA10YT=RR rose 6 Canadian
cents to yield 3.215 percent.
 (Reporting by John McCrank; editing by Rob Wilson)