CANADA FX DEBT-Canada's dollar falls, bonds rise on tame CPI

Fri Jul 22, 2011 8:27am EDT
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 * C$ falls to C$0.9488 to the U.S. dollar, or $1.0549
 * Bond prices rise as odds of fall rate rate hike reduced
 * Canada inflation unexpectedly tame in June
 By Ka Yan Ng
 TORONTO, July 22 (Reuters) - Canada's dollar weakened
against the U.S. currency on Friday after a June Canadian
inflation reading came in surprisingly tame, prompting lowered
odds of interest rate hikes later this year.
 Canadian inflation slowed to 3.1 percent in June from an
eight-year high of 3.7 percent in May, still a notch above the
central bank's 1-3 percent target range. [ID:nN1E76L02X]
 Core inflation, which excludes volatile items like
gasoline, unexpectedly fell to 1.3 percent in the 12-month
period to June from 1.8 percent in May.
 "To deliver 1.3 (percent) -- it caught the market looking
the other way," said Jack Spitz, managing director of foreign
exchange at National Bank Financial.
 Both measures of the consumer price index dropped to the
lowest year-on-year rate since February and were tamer than
forecast by any of the 19 analysts in a Reuters poll. The
median forecast was for overall inflation of 3.6 percent and a
core rate of 1.9 percent.
 The Canadian currency CAD=D4 slipped as low as C$0.9504
to the U.S. dollar, or $1.0522, down from around C$0.9465 to
the U.S. dollar, or $1.0565, just prior to the data.
 At 8:15 a.m. (1215 GMT), it was at C$0.9488 to the U.S.
dollar, or $1.0549, down from Thursday's North American finish
of C$0.9454 to the U.S. dollar, or $1.0578.
 It had climbed to a 3-1/2 year high in the previous
session, spurred by market perceptions of a more hawkish tone
in Bank of Canada statements earlier this week as well as
optimism that progress was being made by euro zone leaders to
keep the sovereign debt crisis contained.
 Canadian government bond prices were mostly higher across
the curve, reflecting lowered odds of rate hikes for the rest
of the year after the CPI figures suggested interest rates
could come at a leisurely pace.
 "It buys them a little bit more breathing room," said Mazen
Issa, macro strategist at TD Securities.
 The two-year bond CA2YT=RR jumped 13 Canadian cents to
yield 1.489 percent. Its yield was 1.545 percent just before
the data.
 The 10-year bond CA10YT=RR gained 31 Canadian cents to
yield 2.967 percent.
 Overnight index swaps, which trade based on expectations
for the central bank's policy rate, showed that traders priced
in lower odds of rate hikes in the remaining rate decisions of
the year in September, October and December after the data.
 A full 25-basis-point rate hike is not priced in until
 A Reuters poll on Wednesday showed most of Canada's primary
dealers expected the Bank of Canada to raise interest rates in
September or October. <CA/POLL> [ID:nN1E76J0N0]
 (Editing by Jeffrey Hodgson)