CANADA FX DEBT-C$ gets lift from CPI data, Europe weighs

Fri Nov 18, 2011 4:51pm EST
 
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   * C$ ends higher at C$1.0272 vs US$, or 97.35 U.S. cents
 * Canadian inflation eases, but not as much as expected
 * Bonds retreat across curve
 (Updates closing figures, adds comment)
 By Jennifer Kwan
 TORONTO, Nov 18 (Reuters) - The Canadian dollar edged
slightly higher against the U.S. currency on Friday, breaking
four days of losses, as higher than expected domestic inflation
data curbed market bets for an interest rate cut.
 The consumer price index rose 2.9 percent in October from a
year earlier, easing from 3.2 percent in September, as gasoline
prices rose at a slower year-on-year pace.
 The core inflation rate, closely watched by the Bank of
Canada because it excludes some volatile items, eased to 2.1
percent from 2.2 percent in the previous month. Markets had
forecast, on average, slightly lower rates for total CPI and
core CPI of 2.8 percent and 1.9 percent, respectively.
[ID:nN1E7AH0DM]
 "Above expected core CPI numbers maybe make the Bank (of
Canada) on the margin - very much on the margin - a little bit
less comfortable, potentially, lowering rates," said Benjamin
Reitzes, senior economist and foreign exchange strategist at
BMO Capital Markets.
 "Either way, you'd need some sort of blow-up in Europe,
something significantly negative, for them to move on that
front."
 Higher interest rates tend to support a country's currency
by attracting capital flows.
 After the data, the Canadian dollar CAD=D4 touched a high
of C$1.0200 against the greenback, or 98.04 U.S. cents, before
retreating to end the session at C$1.0272, or 97.35 U.S. cents.
That was up from Thursday's session close at C$1.0283 versus
the greenback, or 97.25 U.S. cents, but down 1.5 percent on the
week.
 Analysts surveyed by Reuters expect the next Bank of Canada
interest rate move to be an increase, sometime in mid- to late
2012 or early 2013. [CA/POLL]
 Markets have been pricing in a rate cut for some time.
Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that traders scaled
back bets on a rate cut for this year or next after the
inflation data. BOCWATCH
 Still, in the short term, market watchers expect moves by
the currency to be hinged largely on events outside of Canada.
 "CPI is not the driving factor for the Canadian dollar,
it's not the driving factor for the market, it's not the
driving factor for Bank of Canada policy. We're more focused on
Europe and the broader picture, and the Canadian dollar is as
well," Reitzes said.
 The euro gained on Friday on hopes the European Central
Bank may get involved in a plan to help struggling euro zone
countries, but world stocks fell as many investors continued to
fear a spread of the region's debt crisis into core European
economies. [FRX/] [MKTS/GLOB]
 David Bradley, director of foreign exchange trading at
Scotia Capital, said technical levels to watch for next week
included Canadian dollar support of C$1.0070-75 against the
U.S. dollar, while a key resistance level would be C$1.0310.
 BONDS WEAKER ACROSS CURVE
 Canadian government bond prices were lower across curve,
tracking U.S. Treasuries, where prices fell as a slide in
Italian government bond yields dampened the safety bid for U.S.
debt and some investors unwound Treasury purchases made over
the past several days. [US/]
 "A little more optimism in Europe definitely helps bond
markets in North America," said BMO's Reitzes.
 The two-year bond CA2YT=RR, which is especially sensitive
to Bank of Canada interest rate moves, was down 2 Canadian
cents to yield 0.910.
 The 10-year Canadian government bond CA10YT=RR fell 25
Canadian cents to yield 2.125 percent.
 (Editing by Rob Wilson)