CANADA FX DEBT-C$ rises after bump in Canadian CPI data

Wed Jun 29, 2011 8:10am EDT
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 * C$ rises to C$0.9733 to the U.S. dollar, or $1.0274
 * Bonds slide
 * Gasoline fuels May inflation jump in Canada
 * Rate hike debate reopened
 (Adds details)
 TORONTO, June 29 (Reuters) - The Canadian dollar rose
almost a penny to to its highest in nearly a week against the
U.S. dollar on Wednesday following higher-than-expected May
Canadian inflation data that sparked debate about an interest
rate hike by the end of the year.
 Government bond prices were lower, weighed by the
possibility of rate hikes which the market had previously
discounted as unchanged for rest of year because of broader
global pressures.
 Canadian inflation shot up to 3.7 percent in May to the
highest rate since March 2003, well above expectations and far
above the Bank of Canada's 2.0 percent target. [ID:nN1E75S02V]
 The month-on-month rise in prices more than doubled to 0.7
percent from 0.3 percent in April. Analysts expected the
monthly rate to fall to 0.2 percent, and saw the annual rate
holding steady at 3.3 percent. The April rate was 3.3 percent.
 "Core inflation has also grinded up over the last few
months, so therefore we cannot toss away the possibility of a
hike in 2011," said Sebastien Lavoie, assistant chief economist
at Laurentian Bank Securities.
 The Bank of Canada has said inflation would be above 3.0
percent -- it has a target rate of 1.0 percent to 3.0 percent
-- "in the short term" before returning to 2.0 percent by
 Its core measure, which excludes volatile items such as
gasoline, fruit and vegetables, rose to 1.8 percent from the
1.6 percent in April and the forecast by analysts for May.
 Swaps markets have been reducing bets on when the Bank of
Canada might next raise interest rates. A Bank of Canada poll
on May 31 had shown most primary dealers expect a rate hike in
September, but some of those expectations have since shifted as
 Part of the reason for the shift is that the Canadian
economy hit a soft patch, and combined with a highly uncertain
global outlook, it could mean the Bank of Canada will be in no
rush to raise its key interest rate from the current ultra-low
1.0 percent.
 "I still think we're in such a risk-filled economic
environment, that the Bank of Canada is inclined to wait and
see how things play out before once again resuming their rate
hiking cycle," said Craig Alexander, chief economist at
Toronto Dominion Bank.
 Growing optimism that Greece's parliament would pass an
austerity plan critical to avoiding a debt default also favored
riskier assets on Wednesday, with global stocks on the rise as
well as the price of oil. [MKTS/GLOB]
 At 8 a.m. (1200 GMT), the currency CAD=D4 was at C$0.9733
to the U.S. dollar, or $1.0274, up from Tuesday's North
American finish at C$0.9827 to the U.S. dollar, or $1.0176.
 It had climbed as high as C$0.9723 to the U.S. dollar, or
$1.0285 shortly after the data, rising about half a cent from
pre-data levels.
 The two-year bond CA2YT=RR dropped 18 Canadian cents to
yield 1.533 percent, while the 10-year bond CA10YT=RR fell 51
Canadian cents to yield 3.048 percent.
 (Reporting by Solarina Ho and Ka Yan Ng; Editing by Jeffrey