February 27, 2019 / 8:28 PM / 3 months ago

CANADA FX DEBT-C$ rises as oil rally eclipses inflation slowdown

 (Adds strategist quotes and details throughout; updates prices)
    * Canadian dollar rises 0.2 percent against greenback
    * Price of U.S. oil climbs 2.6 percent
    * Canada's inflation rate falls to 1.4 percent in January
    * Bond prices decline across a steeper yield curve

    By Fergal Smith
    TORONTO, Feb 27 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, as higher oil prices
outweighed tame domestic inflation data that supported a patient
approach from the Bank of Canada on raising interest rates
further.
    At 3:08 p.m. (2008 GMT), the Canadian dollar          was
trading 0.2 percent higher at 1.3148 to the greenback, or 76.06
U.S. cents. The currency, which on Monday touched its strongest
in nearly three weeks at 1.3113, traded in a range of 1.3119 to
1.3176.    
    "This is an oil move," said Eric Viloria, an FX strategist
at Crédit Agricole CIB. "It looks like the correlation between
oil and the CAD has increased recently and that's really a
reflection of oil becoming a more relevant driver in terms of
the monetary policy outlook."
    The price of oil, one of Canada's major exports, climbed
after a surprising plunge in U.S. crude inventories and as
OPEC's de facto leader Saudi Arabia appeared unfazed by pressure
from U.S. President Donald Trump to prevent oil prices from
rising. U.S. crude oil futures        settled 2.6 percent higher
at $56.94 a barrel.             
    The three-month rolling correlation between the Canadian
dollar and oil has climbed to about 90 percent, according to
Refinitiv Eikon data, indicating that the currency and the
commodity move mostly in the same direction. In September last
year, the correlation was negative.
    The Bank of Canada is widely expected to leave its benchmark
interest rate on hold at 1.75 percent when it decides on policy
next week. In January it said low oil prices harmed the economy
in the fourth quarter of 2018 and will continue to do so in the
first quarter of this year.             
    "We are expecting the Bank of Canada to resume its
normalization later this year but that's not going to happen
until there's evidence that the economy is getting back on track
after this oil-related slowdown," Viloria said.
    Lower gasoline prices pulled Canada's annual inflation rate
in January down to 1.4 percent from 2.0 percent in December,
reinforcing market expectations that imminent interest rate
hikes are off the table.                     
    Canada's fourth-quarter gross domestic product data is due
on Friday.
    Canadian government bond prices were lower across a steeper
yield curve in sympathy with U.S. Treasuries. The two-year
           fell 4 Canadian cents to yield 1.777 percent and the
10-year             declined 41 Canadian cents to yield 1.915
percent.  

 (Reporting by Fergal Smith
Editing by Chizu Nomiyama)
  
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