February 24, 2017 / 2:47 PM / 3 years ago

CANADA FX DEBT-C$ posts 1-week high as domestic inflation spikes

    * Canadian dollar at C$1.3101, or 76.33 U.S. cents
    * Loonie touches its strongest since Feb. 16 at C$1.3057
    * Bond prices higher across the yield curve

    By Fergal Smith
    TORONTO, Feb 24 (Reuters) - The Canadian dollar notched a
one-week high against its broadly weaker U.S. counterpart on
Friday as a spike in domestic inflation offset a drop in oil
    Canada's annual inflation rate unexpectedly jumped to 2.1
percent in January, its highest in more than two years.
    "It is a pretty eye-catching number," said Andrew Kelvin,
senior rates strategist at TD Securities.
    The chances of a Bank of Canada interest rate hike this year
rose to nearly 30 percent from 24 percent before the inflation
report, data from the overnight index swaps market showed.
    But economists said the central bank will be untroubled by
the headline rise, which was driven by higher gasoline prices.
    "My sense is that the Bank of Canada will look through this
just given that all three measures of core (inflation) are
running below two percent," Kelvin said.
    The U.S. dollar        weakened as the "Trumpflation trade"
that took the greenback to 14-year highs earlier this year
faded, and as worries over France's presidential election eased.
    U.S. crude        prices were down 0.92 percent at $53.95 a
barrel after U.S. crude inventories rose for a seventh week.
    Oil is one of Canada's major exports.
    At 9:25 a.m. ET (1425 GMT), the Canadian dollar          was
trading at C$1.3101 to the greenback, or 76.33 U.S. cents,
stronger than Thursday's close of C$1.3114, or 76.25 U.S. cents.
    The currency's weakest level of the session was C$1.3119,
while it touched its strongest since Feb. 16 at C$1.3057.
    Gains for the loonie came one day after U.S. Treasury
Secretary Steven Mnuchin said he does not see any changes to the
North American Free Trade Agreement in the short term.
    Canada sends 75 percent of its exports to the United States
and could suffer badly if U.S. President Donald Trump follows
through on promises to renegotiate NAFTA.
    In an interview with Reuters on Thursday, Trump spoke
favorably about a potentially export-boosting border adjustment
tax being pushed by Republicans in the U.S. Congress, but did
not specifically endorse it.
    The loonie would be among the biggest losers if the border
tax is implemented, analysts say.             
    Canadian government bond prices were higher across the yield
curve in sympathy with U.S. Treasuries. The two-year           
rose 0.5 Canadian cent to yield 0.765 percent and the 10-year
            climbed 25 Canadian cents to yield 1.639 percent.
    The 10-year hit its lowest intraday since Feb. 9 at 1.637

 (Reporting by Fergal Smith; Editing by Andrea Ricci)
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