CANADA FX DEBT-C$ dips, rate hikes in question after CPI data
* Canada August annual inflation edges lower
* C$ hits session low, pares losses to 97 U.S. cents
* Short-dated bonds prices edge higher (Updates with details)
TORONTO, Sept 21 (Reuters) - The Canadian dollar fell to a session low against the U.S. currency on Tuesday after Canada's annual inflation rate in August slowed, suggesting the Bank of Canada may pause in its interest rate hiking campaign.
Canada's annual inflation rate in August slowed to 1.7 percent from 1.8 percent in July as energy prices moderated and clothing prices fell, Statistics Canada said. Analysts surveyed by Reuters had expected a slightly higher annual rate of 1.9 percent. The annual core inflation rate remained at 1.6 percent in August from July. For details, see [ID:nSCLLKE65M]
"Generally speaking, most of the details here are a little bit below expectations, but not a major surprise," said Doug Porter, deputy chief economist at BMO Capital Markets.
The Canadian dollar fell as low as C$1.0324 to the U.S. dollar, or 96.86 U.S. cents, from about C$1.0285 to the U.S. dollar, or 97.23 U.S. cents, shortly before the data was released.
By 7:35 a.m. (1135 GMT), the currency had pared losses to C$1.0309 to the U.S. dollar, or 97.00 U.S. cents, down from Monday's close at C$1.0293 to the U.S. dollar, or 97.15 U.S. cents.
Interest-rate sensitive short-dated Canadian bond prices turned positive after the data, but lagged its U.S. counterparts, ahead of the U.S. Federal Reserve's policy announcement, expected at 2:15 p.m.
The two-year bond was up 1 Canadian cent to yield 1.507 percent, while the 10-year bond was off 5 Canadian cents to yield 2.950 percent.
Analysts said the tame inflation numbers meant third-quarter inflation, calculated on a annual basis, would likely be slightly lower than the Bank of Canada's July forecast of 1.8 percent.
This could give the central bank more reason to pause after raising its benchmark interest rate three times since the start of June. The overnight rate currently stands at 1 percent.
"We still think (the Bank of Canada is) going to pass in October and pass again in December. Realistically it's not really an inflation story, it's more a growth story and a U.S. growth story as well," said Mark Chandler, head of Canadian fixed income and currency strategy, RBC Capital Markets.
"This certainly gives them enough cover if they wanted to do that but really it will come down to a view on their growth forecast."
Market pricing, as measured by a Reuters calculation of yield on overnight index swaps, remained steady and indicated about a 64 percent likelihood of no change in interest rates at the Bank of Canada's policy-decision date next month. BOCWATCH
"We haven't seen any trade yet really to reflect whether that has changed," said Chandler. "There are lots of fish to fry today."
Market focus now shifts to the U.S. central bank, which is not expected to make any new monetary policy moves on Tuesday. However, the post-meeting statement will be closely scrutinized for signals about whether further large-scale asset purchases are needed to support the sluggish recovery. For details, see [ID:nSGE68J04M] (Reporting by Ka Yan Ng; Editing by Chizu Nomiyama)
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