CANADA FX DEBT-C$ falls to 1-mth low as CPI, global fears weigh

Fri Aug 20, 2010 2:59pm EDT
 
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   * C$ falls to 95.10 U.S. cents
 * July inflation misses expectations
 * Bonds up after weak CPI data
 (Updates to mid-afternoon)
 By Claire Sibonney
 TORONTO, Aug 20 (Reuters) - The Canadian dollar slid to a
one-month low versus the U.S. dollar on Friday as risk appetite
soured over revived fears of slowing global growth and domestic
inflation data came in below market expectations.
 Canadian consumer prices charged higher in July as a new
sales taxes took effect in Ontario and British Columbia, but
underlying inflation remained tame, fueling doubts about how
fast the Bank of Canada would continue to raise interest rates
as the recovery loses steam. [ID:nN20500487]
 The currency CAD=D4 slid to C$1.0515 to the U.S. dollar,
or 95.10 U.S. cents, its lowest level since July 20, and well
off Thursday's close at C$1.0399 to the U.S. dollar or 96.16
U.S. cents.
 "The soft inflation numbers for Canada just added further
weight to the notion that the Bank of Canada would have to go
on hold on rates at some point soon and that's a negative for
the Canadian dollar," said Avery Shenfeld, chief economist at
CIBC World Markets.
 The consumer price index rose 0.5 percent in July,
following a 0.1 percent fall in June. Analysts in a Reuters
poll had forecast a 0.6 percent monthly rise for an annual rate
of 1.9 percent.
  Core CPI, which excludes volatile items and the effects of
tax changes, fell by 0.1 percent on the month after decreasing
by 0.1 percent in June.
 A poll conducted by Reuters after the data showed Canada's
primary securities dealers still predict the central bank will
raise interest rates for a third time this year in September,
but uninspiring economic data has cast doubt on the pace of
future increases. [ID:nN20198572]
 The Canadian dollar, however, was already weaker heading
into the inflation report, as investors dumped stocks,
commodities and commodity-linked currencies following
Thursday's poor U.S. jobs and manufacturing numbers.
[ID:nN19350083]
 As well, comments from Axel Weber, a member of the European
Central Bank's governing council, who said on Friday the ECB
should extend its loose monetary stance, were viewed as
suggesting more weakness ahead in the euro zone and fueled
investor worries. [ID:nLDE67J0IR]
 "There was a spike up in risk aversion this morning," said
Camilla Sutton, senior currency strategist at Scotia Capital.
 "Weber's comments from the ECB, who we generally think of
as being a hawk -- he actually sounded fairly dovish -- so I
think that drove some euro weakness and then obviously the
inflation data for Canada kind of sealed it for a weak Canada
performance."
 At 2:30 p.m. (1830 GMT), the currency stood at C$1.0499 to
the U.S. dollar, or 95.25 U.S. cents.
 The currency had rallied sharply earlier in the week a
takeover bid for Potash Corp by BHP Billiton. [ID:nSGE67J03V]
 Details of the offer released on Friday confirmed that
payments would be made in U.S. dollars, which is still
supportive of the Canadian currency as a sizable amount could
be expected to be converted by Canadian shareholders.
 "It's not what the denomination is of the initial check.
It's where the recipients reside and what currency they then
put the money," said CIBC's Shenfeld. "It was only going to be
a proportion of the total purchase price in any event."
 BONDS RALLY AFTER SOFT CPI
 Government bond prices, especially at the short end of the
yield curve, jumped after the lower than expected inflation
data led investors to bet the Bank of Canada would pause in its
rate-hike campaign this year.
 "Given that there was going to be a lot of volatility with
the HST (harmonized sales tax) in terms of this number, the
bond market really wasn't sure what to make of it," said David
Tulk, senior macro strategist at TD Securities.
 "They certainly focused in on what core inflation was
showing because that was a lot less than what people had
expected, and the bond market saw cause to rally."
 Canada's two-year bond CA2YT=RR rose 17 Canadian cents to
yield 1.282 percent, while the 10-year bond CA10YT=RR was up
7 Canadian cents to yield 2.913 percent.
  (Reporting by Claire Sibonney; editing by Rob Wilson)