CANADA FX DEBT-C$ firms on strong data, steady equities

Fri May 21, 2010 11:44am EDT
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   * C$ touches high of C$1.0562, or 94.68 U.S. cents
 * Strong inflation, retail sales data boosts C$
 * Bond prices mixed across curve
 (Recasts, adds details)
 By Jennifer Kwan
 TORONTO, May 21 (Reuters) - Canada's dollar fought back
from a 14-week low to hit a session high against its U.S.
currency on Friday, supported by stabilizing equity markets and
domestic data that kept alive the possibility of a June 1
interest rate hike.
 The currency touched a high of C$1.0562 to the U.S. dollar,
or 94.68 U.S. cents, bouncing off a low of C$1.0753 to the U.S.
dollar, or 93.00 U.S. cents, its lowest level since Feb. 9.
 The rally was supported by data that showed Canadian
inflation was higher than expected in April, while retail sales
in March soared from February. [ID:nN21149251] [ID:nN21207192]
 "It all comes back to expectations of interest rates," said
J.P. Blais, vice-president foreign exchange products at BMO
Capital Markets.
 "With stronger data it's giving them more reasons to hike
rates, and if markets are stabilizing it's giving them the
green light to hike rates, making the Canadian dollar more
appealing. Hence the Canadian dollar is stronger this
 Inflation was higher than expected in April at 1.8 percent,
up from 1.4 percent in March. The closely watched core rate
jumped to 1.9 percent, nudging up against the central bank's 2
percent target. Consumers spent heavily on motor vehicles and
parts in March, helping overall retail sales to jump 2.1
percent, the most in five years.
 The currency also got a lift as equity markets stabilized
after being pummeled in recent sessions on concern that
austerity measures in euro zone countries would hurt European
and global growth. [.N] [MKTS/GLOB]
 "Equities were down a fair bit pre-open. The fact that they
are holding pretty much unchanged it's bringing back a little
more confidence in the system," Blais said.
 At 11:34 a.m. (1534 GMT), the currency CAD=D4 was at
C$1.0572 to the U.S. dollar, or 94.59 U.S. cents, up from
C$1.0678, or 93.65 U.S. cents, at Thursday's close.
 Despite the strong data, economists and strategists say the
market is largely on edge over whether the Bank of Canada will
raise interest rates at its June 1 announcement.
 "It doesn't answer the question as to whether or not the
Bank of Canada goes on June 1. I think that's what most traders
are looking at: Is this number going to be a decisive enough
reason to move on June 1?" said Jack Spitz, managing director
of foreign exchange at National Bank Financial.
 "And, setting aside the other factors that are influencing
the markets, being risk on, risk off, equities, uncertainties
with respect to Europe, China, global growth concerns, they
remain very, very much influential in what will likely be a
decision that will come right down to June 1 for the Bank of
 The data kept market expectations, as measured by yields on
overnight index swaps, about evenly split on whether the Bank
of Canada raises interest rates next month. BOCWATCH
 Market volatility arising from the European debt crisis has
dramatically eroded the market's sense of pending rate
increases. They were a near certainty a month ago when the
central bank removed its conditional commitment to leave rates
unchanged at 0.25 percent until the end of June.
 Canadian bond prices were slightly weaker at the short end
and firmer at the long end, which followed U.S. Treasury issues
higher as investors flocked to the safety of government debt.
 The two-year government bond CA2YT=RR sagged 7 Canadian
cents to C$99.71 yield 1.647 percent, while the 10-year bond
CA30YT=RR gained 15 Canadian cents to C$121.60 to yield 3.725
 Another factor that may influence markets on Friday is
liquidity, which could dry up as the Canadian bond market
closes at 1 p.m. (1700 GMT) ahead of the holiday weekend.
Financial markets are closed on Monday for Victoria Day.
 (Additional reporting by Ka Yan Ng and Claire Sibonney;
editing by Rob Wilson)