CANADA FX DEBT-C$ strengthens as Canadian inflation jumps

Fri Oct 21, 2011 8:14am EDT
 
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 * C$ at C$1.0120 vs US$, or 98.81 U.S. cents
 * Touches session-high C$1.01 after CPI jump
 * Inflation above central bank's comfort zone
 * Bond prices fall, Canada underperforms
 By Andrea Hopkins
 TORONTO, Oct 21 (Reuters) - The Canadian dollar
strengthened against its U.S. counterpart in early trade on
Friday after Canadian inflation came in above expectations,
slashing already slim odds that the central bank will cut
interest rates.
 While near-term pressures including the debt crisis in
Europe are expected to keep the Bank of Canada from tightening
until at least next year, the unexpectedly strong rise in
consumer prices in September all but erased the chances the
Bank will soon trim official interest rates to support growth.
 "This reduces any expectation of a near-term cut, so that's
providing support for the Canadian dollar," said Paul Ferley,
assistant chief economist at Royal Bank of Canada.
 "(There was) certainly more inflation pressure than
expected going into the report. It was evident both in overall
and core -- from a policy point of view the increase in core
has got to be of the greatest concern, with the measure now
moving slightly above the mid-point of the Bank of Canada's
target range."
 The Canadian dollar CAD=D3 climbed to a session high
C$1.01 to the U.S. dollar, or 99.01 U.S. cents, in the first 30
minutes after the data was released, well above Thursday's
North American session close at C$1.0150, or 98.52 U.S cents.
 At 7:46 a.m. (1146 GMT), it had eased back slightly to
C$1.0120 to the U.S. dollar, or 98.81 U.S. cents.
 The data showed Canada's annual core inflation rate jumped
in September to its highest level since December 2008. The core
rate sped up more than expected to 2.2 percent from 1.9 percent
in August. Analysts had forecast a 1.9 percent rate.
 Higher gasoline and food prices pushed up the overall
consumer price index up by 3.2 percent from a year earlier, a
notch above market forecasts. [ID:nN1E79K02G]
 "The jump in the core index is quite surprising. It's quite
a large increase for the second straight month," said Sal
Guatieri, senior economist at BMO Capital Markets.
 "On the surface, to the extent it reduces expectations of a
Bank rate cut, it's positive for the Canadian dollar."
 Still, Guatieri said the jump in inflation pressure is not
enough to suggest the Bank will raise interest rates, given the
worries about the global economic environment.
 Europe's long-running debt saga was meant to be resolved at
a meeting of regional leaders on Sunday, but disagreement over
the make-up of the sovereign rescue fund, the EFSF, stalled
talks and sparked a selloff in riskier assets on Thursday.
 Stocks clawed back some ground on Friday after France and
Germany said a comprehensive euro zone debt deal was on its
way, if a little late, although a subdued euro and choppy
German bonds showed not everyone was convinced. [MKTS/GLOB]
 Canadian government bond prices fell on the inflation data
and underperformed U.S. Treasuries. CABONEA
 The yield on the two-year Canadian government bond
CA2YT=RR, which is especially sensitive to Bank of Canada
interest rate moves, rose to 1.068 percent from 1.043 percent
just before the release. <0#CABMK=>
 The 10-year bond CA10YT=RR fell 32 Canadian cents to
yield 2.349 percent.
 (Editing by Jeffrey Hodgson)