January 25, 2008 / 2:01 PM / 10 years ago

Loonie dips on inflation data, bonds up

4 Min Read

TORONTO (Reuters) - The Canadian dollar dipped slightly against the U.S. dollar on Friday, as inflation numbers for December came in lower than expected, opening the door for further interest rate cuts by the Bank of Canada.

Canadian bond prices rose after the data.

At 8:42 a.m., the Canadian unit was at C$1.0072 to the U.S. dollar, or 99.29 U.S. cents, down from C$1.0061 to the U.S. dollar, or 99.39 U.S. cents, at Thursday's close.

The Canadian dollar fell as low as C$1.0111, or 98.90 U.S. cents, after Canada's core inflation rate unexpectedly slowed to a two-year low of 1.5 percent in December.

"I think the market's got the old bee-in-the-bonnet about the Bank of Canada, which will now have no concerns over the next meeting's rate cut, and I think that's probably taken a bit of the shine off the Canadian dollar," said Steve Butler, director of foreign exchange at Scotia Capital.

Analysts had forecast an annual core rate of 1.7 percent.

Core inflation is carefully watched by the central bank regarding its interest rate decisions, and December's lower-than-expected number leaves the door wide open for further rate cuts.

The Bank of Canada lowered its key overnight rate by 25 basis points to 4.00 percent on Tuesday.

On the same day, the U.S. Federal Reserve unexpectedly slashed its key lending rate by 75 basis points, to 3.50 percent, as it tries to deal with an economic slowdown brought on by a crisis in the U.S. housing sector.

While that opened up an interest rate spread in favor of Canada and its currency, it also increased expectations that the Bank of Canada would continue to cut rates going forward.

Before the Bank of Canada meets in March, the Fed has a fixed rate setting day on Wednesday, when it is expected to cut its key lending rate by half-a-percentage-point. That, along with a bounce higher in commodity prices, should give the Canadian dollar some short-term strength, said Butler.

"For now, just on the interest rate play, I think Canada's probably got a little bit of momentum in it's favor."

Butler said the Canadian dollar would likely have another look at parity with the greenback, probably some time next week.

Bonds Rise

Canadian bonds rose across the curve on the inflation numbers before settling back at pre-data levels.

The rest of the session will likely be dictated by moves in the stock markets, said Carlos Leitao, chief economist at National Bank Financial.

The overnight Canadian Libor rate LIBOR01 was at 4.0950 percent and the 3 month Libor rate was at 4.0967 percent.

The two-year bond rose 3 Canadian cents to C$101.70 to yield 3.286 percent. The 10-year bond climbed 10 Canadian cents to C$100.52 to yield 3.932 percent.

The yield spread between the two-year and 10-year bond was 64.4 basis points, up from 64.2 points at the previous close.

The 30-year bond was up 23 Canadian cents at C$113.25 to yield 4.209 percent. In the United States, the 30-year Treasury yielded 4.373 percent.

The three-month when-issued T-bill yielded 3.41 percent, up from 3.40 percent at the previous close.

Editing by Renato Andrade

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