June 23, 2017 / 1:55 PM / 3 years ago

CANADA FX DEBT-C$ weakens as subdued inflation reduces rate hike chances

    * Canadian dollar at C$1.3305 or 75.16 U.S. cents
    * Canada's annual inflation rate cools to 1.3 percent in May
    * Bond prices higher across much of a steeper yield curve
    * Two-year yield falls 3 basis points further below its U.S.

    By Fergal Smith
    TORONTO, June 23 (Reuters) - The Canadian dollar fell on
Friday against its U.S. counterpart after weaker-than-expected
domestic inflation data reduced the chances of an interest rate
hike next month from the Bank of Canada.
    The annual inflation rate cooled to 1.3 percent in May,
below forecasts for 1.5 percent, pushing it further away from
the Bank of Canada's 2 percent target as the cost of food fell
and gasoline prices moderated, data from Statistics Canada
    The central bank's three measures of core inflation remained
    "It is going to be very difficult for the Bank (of Canada)
to hike as soon as next month when you still haven't carved out
a bottom on inflation," said Derek Holt, head of capital markets
economics at Scotiabank.
    Chances of a hike in July fell to just 20 percent from
one-in-three before the inflation report, data from the
overnight index swaps market showed.           
    The Bank of Canada's top two officials last week said that
looser monetary policies put in place in 2015 had largely done
their work, and the bank would assess whether rates must remain
at near-record lows.             
    At 9:13 a.m. ET (1313 GMT), the Canadian dollar          was
trading at C$1.3305 to the greenback, or 75.16 U.S. cents, down
0.5 percent.
    The currency traded in a range of C$1.3211 to C$1.3307.
    Canadian government bond prices were higher across much of a
steeper yield curve, with the two-year            price up 4.5
Canadian cents to yield 0.911 percent and the 10-year
            rising 10 Canadian cents to yield 1.489 percent.
    The two-year yield fell 3 basis points further below its
U.S. equivalent to a spread of -43.8 basis points, as Canadian
bonds outperformed. On Thursday, the spread had touched its
narrowest in nearly four months at -40.8 basis points.

 (Reporting by Fergal Smith; Editing by W Simon)
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