February 24, 2017 / 9:48 PM / 3 years ago

CANADA FX DEBT-C$ posts 1-week high on inflation spike before paring gains

 (Adds analyst quotes and background details and updates prices)
    * Canadian dollar at C$1.3101, or 76.33 U.S. cents
    * Loonie touches strongest since Feb. 16 at C$1.3057
    * Bond prices higher across yield curve
    * 10-year yield touches a 2-1/2-month low at 1.599 percent

    By Fergal Smith
    TORONTO, Feb 24 (Reuters) - The Canadian dollar notched a
one-week high against its U.S. counterpart on Friday after data
showed a spike in domestic inflation, but some gains were pared
ahead of a Bank of Canada interest rate decision next week.
    Economists say the central bank will put more stock in its
three measures of core inflation which were all below 2 percent.
But the jump in headline inflation to its highest annual rate in
more than two years of 2.1 percent caught market participants
off guard.             
    "It is a pretty eye-catching number," said Andrew Kelvin,
senior rates strategist at TD Securities.
    "This is certainly more substantial than we'd anticipated."
    Bank of Canada Governor Stephen Poloz said in January that
an interest rate cut remains on the table if the risks facing
the country are realized. He warned of "material consequences"
if U.S. President Donald Trump enacts protectionist policies.
    "It is hard to see them being as dovish as they were last
time," said Michael Goshko, corporate risk manager at Western
Union Business Solutions.
    Improved domestic and global data, higher oil prices and
reduced risk of trade disruptions have improved the outlook for
Canada's commodity-linked currency, Goshko added.
    On Thursday, U.S. Treasury Secretary Steven Mnuchin said he
does not see any changes to the North American Free Trade
Agreement in the short term.             
    The Canadian dollar          ended at C$1.3109 to the
greenback, or 76.28 U.S. cents, slightly 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.
    For the week, the loonie dipped 0.1 percent.
    Gains for the Canadian dollar on Friday came even as prices
of oil, one of Canada's major exports, fell. U.S. crude       
prices settled 46 cents lower at $53.99 a barrel on worries
about rising U.S. supplies.      
    The U.S. dollar        edged higher against a basket of
major currencies, but was restrained by investors' doubts about
the likelihood of swift U.S. tax reform.             
    A border adjustment tax is part of the House Republican tax
reform blueprint. The loonie would be among the biggest losers
if it is implemented, analysts say                         
    Canadian government bond prices were higher across a flatter
yield curve in sympathy with U.S. Treasuries amid European
political uncertainty.
    The 10-year             climbed 54 Canadian cents to yield
1.605 percent. It touched its lowest intraday since Dec. 7 at
1.599 percent.

 (Reporting by Fergal Smith; editing by Diane Craft)
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