CANADA FX DEBT-C$ weakens after soft inflation data; eye on Fed

Tue Jan 25, 2011 4:20pm EST
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   * C$ softens to C$0.9976, or $1.0024
 * Tame inflation cuts pressure on Bank of Canada to hike
 * Bonds also rally on weak equities, risk aversion
 * Federal Reserve's FOMC, U.S. new home sales in focus
 (Updates to close. Adds details, comment)
 By Solarina Ho
 TORONTO, Jan 25 (Reuters) - The Canadian dollar weakened
against the U.S. currency on Tuesday as softer-than-expected
inflation data made it more likely that the Bank of Canada will
hold rates steady in the near-term.
 Higher gasoline prices helped push Canada's annual headline
inflation rate to 2.4 percent from 2 percent the month before,
but this was below the 2.5 percent economists had forecast.
 "A softer-than-expected inflation number generally speaking
is negative for the Canadian dollar because it means the Bank
of Canada is less likely to be raising interest rates soon,"
said Craig Alexander, chief economist at Toronto-Dominion
 Currencies usually strengthen as domestic interest rates
rise because this tends to lure capital flows from other
 The currency CAD=D4 closed at C$0.9976 to the U.S.
dollar, or $1.0024, down from Monday's North American finish at
C$0.9946 to the U.S. dollar, or $1.0054.
 It hit a session low of C$1.0005, or $0.9995 just after the
inflation data was released.
 "The action was entirely this morning ... the odds of
Canada tightening declined, that pushed the dollar weaker and
now we've pretty much moved sideways since then," said Benjamin
Reitzes, an economist at BMO Capital Markets.
 Weaker oil prices and equity markets also weighed on the
commodity-sensitive Canadian dollar. The price of oil, a major
Canadian export, fell for a sixth consecutive day. [O/R]
 With little significant Canadian data out for the rest of
the week, analysts said investors will be taking their cues
from south of the border.
 The statement from the U.S. Federal Reserve's
policy-setting meeting on Wednesday will be in focus, alongside
new U.S. home sales data, as the health of the housing market
is seen as key to the U.S. economic recovery.
 "A stronger U.S. always bodes well for Canada," said
 Canadian bond prices rallied across the board. The
inflation data pushed money market and bond yields lower at the
start of the session, with weak stock markets spurring further
 The two-year bond CA2YT=RR was up 9.2 Canadian cents to
yield 1.676 percent, while the 10-year bond CA10YT=RR added
43 Canadian cents to yield 3.265 percent.
 Canadian government bonds outperformed U.S. Treasuries,
which were also boosted by talk of a U.S. budget freeze. [US/]
 (Editing by Jeffrey Hodgson)