June 22, 2012 / 1:14 PM / in 5 years

Canadian dollar recovers after sell-off; CPI weighs

Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007.Christinne Muschi

TORONTO (Reuters) - Canada's dollar eked out a small gain against its U.S. counterpart on Friday, recovering along with broader equity and oil prices after a sharp sell-off the day before on global economic growth fears.

Oil rebounded Friday from 18-month lows and global stocks stabilized as investors looked to possible crisis resolution at upcoming meetings of European leaders rather than at weak data. <MKTS/GLOB>

At around 8:55 a.m., the Canadian currency was at C$1.0288 to the greenback, or 97.20 U.S. cents. But it touched C$1.0301 versus the U.S. dollar, or 97.08 U.S. cents, its weakest since June 13, just after domestic data showed Canada's annual inflation slowed more sharply than expected in May to 1.2 percent.

Inflation, down from 2 percent in April, was below the 1.5 percent median forecast by analysts in a Reuters poll.

The closely watched core annual inflation rate, a better measure of underlying price trends because it excludes eight volatile items, stayed closer to the Bank of Canada's 2 percent target, easing to 1.8 percent in May from 2.1 percent in the previous month.

"Overall it's a little bit softer than market expectations so it will likely add to the underlying softness we've seen in the Canadian dollar recently," said Doug Porter, deputy chief economist at BMO Capital Markets.

However, Porter added the central bank has "got much bigger items on their plate" than inflation.

"I don't think inflation is crowding the top of anybody's worry list at this point. So I don't think it has a big effect on the Bank, but at the very least it just sort of reinforces the message that there's not any rush for the Bank to act on its tightening bias," he said.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders slightly increased bets on a rate cut in late 2012 after the inflation data.

The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate moves, fell to 1.025 percent from around 1.051 percent just before the release.

The benchmark 10-year bond was down 18 Canadian cents to yield 1.768 percent.

Additional reporting by Allison Martell Editing by W Simon

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