Canadian dollar pulls back from 10-day high on tepid retail sales gain

TORONTO (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Thursday, pulling back from an earlier 10-day high, after domestic data showed retail sales rose far less than expected in September.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

The 0.1 percent increase was short of economists’ forecasts for a gain of 0.9 percent, while volumes fared worse, declining by 0.6 percent.

“There are vulnerabilities in the (Canadian) economy,” said Scott Lampard, head of Global Markets, HSBC Bank Canada. “If the consumer starts to crack ... that could expose some of these vulnerabilities.”

The Bank of Canada has worried about the impact of higher interest rates on heavily indebted Canadians.

The central bank raised interest rates in July and September for the first time in seven years but has since turned more cautious about the outlook for the domestic economy.

Chances of another hike by the bank's March meeting dipped to 54 percent from 60 percent before the retail sales data, the overnight index swaps market indicated. BOCWATCH.

Investors will be looking to a speech by Bank of Canada Governor Stephen Poloz in December for clues on prospects for more rate hikes.

At 4 p.m. (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2718 to the greenback, or 78.63 U.S. cents, down 0.1 percent.

The currency’s weakest level of the session was C$1.2730, while it touched its strongest since Nov. 13 at $1.2673.

The currency weakened despite higher prices for oil, one of the country’s main exports.

U.S. crude CLc1 reached a two-year high at $58.58 a barrel as the shutdown of a major crude pipeline from Canada and a draw on fuel inventories pointed to a tightening market.

Still, strong inflows of foreign money into Canadian stocks and bonds this year are adding to investor confidence that the rally since May in the country’s currency is sustainable because it is not just supported by speculative flows.

Canadian government bond prices were higher across a slightly steeper yield curve, with the two-year CA2YT=RR up 4 Canadian cents to yield 1.435 percent and the 10-year CA10YT=RR rising 11 Canadian cents to yield 1.892 percent.

U.S. markets were closed for the Thanksgiving holiday.

Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney