CANADA FX DEBT-C$ pulls back from 3-1/2 yr high on soft CPI data

Fri Jul 22, 2011 9:44am EDT
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 * C$ at C$0.9488 to the U.S. dollar, or $1.0549
 * C$ had reached strongest since Nov. 2007 on Thursday
 * Tame Canada June inflation cools rate hike expectations
 * Bond prices boosted by inflation data
 * C$ catches brief respite from strong May retail sales
 (Updates with details)
 By Ka Yan Ng
 TORONTO, July 22 (Reuters) - Canada's dollar was lower
against the U.S. currency on Friday after a June Canadian
inflation reading came in surprisingly tame, reducing
expectations that interest rates will rise 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, after the inflation data.
 It briefly pared losses to trade at C$0.9467 to the U.S.
dollar, or $1.0563, immediately following data showing retail
sales grew by a stronger-than-expected 0.1 percent in May from
April. [ID:nN1E76L00W]
 But it quickly returned to lower levels as the CPI figures
were the more dominant piece of economic data on Friday.
 "The retail sales number was a good number but it's not
going to drive the Bank of Canada to raise rates in and of
itself," said Shane Enright, executive director, foreign
exchange sales at CIBC World Markets.
 "But there certainly is a possibility that the Canadian
inflation number will deter them from raising rates. So on that
front, it's a much more significant number."
 He said the Canadian dollar had likely touched its weakest
level for the session, although there was "some scope" for it
to soften a bit more if global macro sentiment deteriorated.
 "The market for now is a little bit more predisposed to buy
dollar/Canada on dips," said Enright.
 At 9:11 a.m. (1311 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,
reflecting lowered odds of rate hikes for the rest of the year
after the inflation figures suggested interest rates could come
at a more 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, particularly sensitive to
short-term interest rates expectations, gained 14 Canadian
cents to yield 1.487 percent, compared with a yield of 1.545
percent ahead of the CPI data.
 The 10-year bond CA10YT=RR advanced 41 Canadian cents to
yield 2.955 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)