CANADA FX DEBT-C$ sags, bond prices up after data disappoints

Fri May 20, 2011 9:54am EDT
 
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 * C$, bond yields fall on lower Canada rate hike odds
 * C$ slides as low as C$0.9739 to US$, or $1.0268
 * Inflation below forecast, again above BoC target range
 * Canada retail sales stall in March
 (Adds analyst comment, retail sales data, further details)
 By Ka Yan Ng
 TORONTO, May 20 (Reuters) - Canada's dollar fell sharply on
Friday and bond prices ramped higher as unexpectedly weak
retail sales and inflation data reduced expectations that the
Bank of Canada will soon raise interest rates.
 The data, taken with mixed economic reports from other
corners of the world, ongoing European debt concerns, and the
recent selloff in commodity prices, have combined to remove
pressure from central bank to tighten policy.
 The Bank of Canada hiked rates three times last year. But
it has left its key rate unchanged at 1 percent since September
to monitor the economic recovery's progress.
 "With persistent Canadian dollar strength, even at these
levels, and with the economic backdrops showing benign data ...
I don't think the Bank of Canada should be doing a thing," said
John Curran, senior vice president at CanadianForex.
 "With everything that's going on here globally, the
recovery that everybody's speaking of is still very fragile.
This still could turn downwards for many countries, including
Canada."
 Canada's annual inflation rate stayed at 3.3 percent in
April, a touch less than economists' expectations of 3.4
percent, according to Statistics Canada data. But it was again
over the Bank of Canada's target range of 1 to 3 percent.
[ID:nSCLKGE7CE]
 A second report showed retail sales were flat in March and
actually fell by 0.8 percent in volume terms from February, in
a much weaker showing than analysts had forecast.
[ID:nSCLKGE7CF]
 Both the market and the central bank had expected overall
inflation to stay elevated. Bank of Canada Governor Mark Carney
predicted on Monday that inflation would remain above the
target range of 1 to 3 percent throughout the second quarter
but said inflation expectations remained well-anchored.
 The steady inflation figure in April was in contrast to the
surprising jump in March.
 The figures on Friday caused market players to pare back
rate hike expectations.
 Overnight index swaps, which trade based on expectations
for the central bank's key policy rate, showed traders cut the
odds of rate hikes at every announcement date this year from
July to December. BOCWATCH
 Few expect the central bank to hike rates at its next
policy setting in May as well. [CA/POLL]
 "I would think right now the risk to our (interest rate
hike) call, if anything, is taking it out further for the year
as a whole," said Derek Holt, economist at Scotia Capital.
 "For now we're sticking to the October call, but with the
way we expect the rest of the year to unfold I think the tail
risk is later rather than sooner."
 The currency slid as low as C$0.9739 to the U.S. dollar, or
$1.0268, following the morning's domestic data. At 9:25 a.m.
(1325 GMT), the currency CAD=D4 was at C$0.9711 to the U.S.
dollar, or $1.0298, down from Thursday's close at C$0.9682 to
the U.S. dollar, or $1.0328.
 Canada's two-year bond CA2YT=RR, particularly sensitive
to Bank of Canada rate moves, was up 13 Canadian cents to yield
1.627 percent. The 10-year bond CA10YT=RR rose 30 Canadian
cents to yield 3.180 percent.
 Curran expected trading would thin out by noon ahead of the
long weekend in Canada. Canadian markets are shut on Monday for
Victoria Day.
 (Editing by Jeffrey Hodgson)