CANADA FX DEBT-C$ dips, rate hikes in question after CPI data

Tue Sep 21, 2010 8:05am EDT
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   * 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
 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.
 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
 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.
 "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
  (Reporting by Ka Yan Ng; Editing by Chizu Nomiyama)