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

Fri Jul 22, 2011 5:38pm EDT
 
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 * C$ closes at C$0.9491 to the U.S. dollar, or $1.0536
 * C$ hit highest level since November 2007 on Thursday
 * Tame June inflation data cools rate hike expectations
 * Bond prices boosted by inflation data
 (Updates details, adds comments)
 By Solarina Ho
 TORONTO, July 22 (Reuters) - Canada's dollar finished lower
against the greenback on Friday after Canadian inflation data
for June came in surprisingly tamely, trimming 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, although it was still a
notch above the central bank's 1-3 percent target range.
[ID:nN1E76L02X]
 Core inflation, which excludes volatile items such as
gasoline, unexpectedly fell to 1.3 percent in June from 1.8
percent in May.
 "We thought things were getting a little bit more heated up
for an interest rate hike sooner here in Canada and now after
today's release, we're definitely looking the other way and
saying a little bit later than sooner," said C.J. Gavsie,
managing director of foreign exchange sales at BMO Capital
Markets.
 Both measures of the consumer price index dropped to the
lowest year-on-year rate since February and were lower than
forecast by any of the 19 analysts in a Reuters poll.
 Following the release of stronger-than-expected May retail
sales data on Friday morning, the Canadian currency CAD=D4
briefly pared losses made after the release of the inflation
figures. But it returned to weaker levels as the CPI data
dominated the market. [ID:nN1E76L00W]
 "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.
 The currency finished the session at C$0.9491 to the U.S.
dollar, or $1.0536, down from Thursday's close of C$0.9454, or
$1.0578.
 "We've fallen right back to anchor right around the C$0.95
region. The story is clearly yesterday and earlier in the
week," Gavsie said.
 "The retail sales number definitely looks a bit more
promising, but CPI plays more of an impact here. I'd say we're
now looking at an October-December time frame before we see the
hike coming in."
 The Canadian dollar climbed to a 3-1/2 year high on
Thursday, spurred by market perceptions of a more hawkish tone
in Bank of Canada statements earlier in the week, as well as
optimism that progress was being made by euro zone leaders to
keep the sovereign debt crisis contained.
 Looking ahead, uncertainty over the fate of the U.S. debt
ceiling and the possibility of a U.S. debt default remained on
the radar.
 "Markets are still going to be somewhat apprehensive," said
Gavsie, who said he expected the Canadian dollar to trade
between C$0.95 and C$0.96 in the near term.
 Canadian government bond prices were higher across the
curve, reflecting the lower probability of a rate hike this
year after the inflation figures suggested interest rates could
come at a more leisurely pace.
 The two-year bond CA2YT=RR, particularly sensitive to
short-term interest rates expectations, climbed 6.5 Canadian
cents to yield 1.522 percent.
 The 10-year bond CA10YT=RR advanced 63 Canadian cents to
yield 2.930 percent.
 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]
 (Additional reporting by Ka Yan Ng; editing by Peter
Galloway)