CANADA FX DEBT-C$ weakens after tame inflation datam

Fri Apr 23, 2010 8:26am EDT
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 * C$ falls to C$1.0017 or 99.83 U.S. cents
 * Canada inflation rate dips in March
 By Claire Sibonney
 TORONTO, April 23 (Reuters) -  The Canadian dollar loosened
its grip on parity against the greenback on Friday after data
showed inflation in the country surprisingly dropped, which put
a damper on the prospect of aggressive near-term rate hikes.
 Canada's annual inflation rate in March dipped to 1.4
percent from 1.6 percent in February as travel tour and
accommodation costs returned to pre-Winter Olympic levels. The
annual core inflation rate dropped to 1.7 percent from 2.1
percent. [ID:nOTT003905]
 The Canadian dollar CAD=D4 weakened following the data,
hitting a session low of C$1.0050, or 99.50 U.S. cents,
compared with C$1.0003, or 99.97 U.S. cents just before the
 "We've had a string of somewhat firmer numbers in Canada
recently so this perhaps breaks that particular pattern but it
doesn't remove the risk of the Bank of Canada tightening down
the road and we still think that June is on the cards," said
Shaun Osborne, chief currency strategist at TD Securities.
 "It does remove the risk that we start off the cycle with
the bank at a 50 basis point move."
 The Bank of Canada laid the groundwork this week to raise
interest rates from current record lows, saying it was time to
start withdrawing some of the stimulus that helped pull Canada
out of recession. [ID:nN22251878]
 The central bank said it was no longer promising to keep
its key rate at 0.25 percent until the end of this quarter. Its
next rate decision is June 1.
 But given tame inflation data, "the FX market is also at
least having some second thoughts on just how aggressive the
Bank of Canada is going to be," said Doug Porter, deputy chief
economist at BMO Capital Markets.
 Currencies usually strengthen as interest rates rise
because higher rates tend to attract capital flows.
 At 7:55 a.m. (1155 GMT), the Canadian dollar was at
C$1.0017 to the U.S. dollar, or 99.83 U.S. cents, down from
Thursday's finish at exactly C$1 to the U.S. dollar.
 Earlier this week, the currency rose as high as C$0.9931,
or $1.0069, its strongest level since June 2008, on speculation
that the Bank of Canada may soon raise interest rates.
 "We have had a build-up of long Canadian dollar positions
so this represents perhaps a positional shakeout as well which
might clear the air a little bit for the Canadian dollar but
generally speaking we're still bullish," Osborne added.
 Market watchers will also have a close eye on the impact of
February's retail sales figures out at 8:30 a.m. (1230 GMT)
 Canadian bond yields, which jumped this week following
hawkish language from the Bank of Canada, edged lower following
the data. The yield on the 1-year T-bill CA1YT=RR fell to
1.24 percent from 1.27 percent just before the data.
 The two-year Canadian government bond CA2YT=RR rose 10
Canadian cents at C$99.150 to yield 1.970 percent, down from
2.022 percent just before the report.
 The 10-year bond CA10YT=RR shot up 20 Canadian cents to
C$100.350 to yield 3.704 percent. Its yield was 4.113 percent
just before the data.
 Overnight index swaps, which trade based on expectations
for the Bank of Canada's key policy rate, edged lower after the
announcement, showing the market saw tightening as slightly
less likely than before the data. BOCWATCH.
 Still, the market was pricing in more than a 90 percent
probability that the central bank hikes interest rates by 0.25
percent in June.
  (Reporting by Claire Sibonney, Editing by Jeffrey Hodgson)