August 18, 2017 / 8:52 PM / 3 years ago

CANADA FX DEBT-C$ notches 2-week high as inflation picks up, oil jumps

 (Adds analyst quote, details on CFTC data, Bannon exit; updates
    * Canadian dollar at C$1.2579 per U.S. dollar, or 79.50 U.S.
    * Loonie touches its strongest since Aug. 4 at C$1.2558
    * Bond prices move lower across much of the yield curve
    * 10-year spread vs U.S. Treasuries narrows by 2.5 basis

    By Fergal Smith
    TORONTO, Aug 18 (Reuters) - The Canadian dollar rose to a
two-week high against its U.S. counterpart on Friday, boosted by
data showing an uptick in the rate of underlying inflation and a
jump in oil prices, while political uncertainty weighed on the
    Canada's overall annual inflation rate rose to 1.2 percent
from June's 20-month low of 1.0 percent, while two of the three
measures of core inflation that the Bank of Canada introduced
last year saw gains.             
    "They (the core measures) are trending higher, and this is
consistent with the output gap being almost closed," said Jimmy
Jean, senior economist at Desjardins Capital Markets.
    The output gap is the difference between what an economy
produces and its potential production, without overheating.
    Strengthening in the domestic economy prompted the Bank of
Canada to raise interest rates in July for the first time in
nearly seven years.
    "People don't believe the Fed (U.S. Federal Reserve) is
going to raise rates but are more inclined to believe that the
Bank of Canada is going to raise rates," said Marc Chandler,
global head of currency strategy at Brown Brothers Harriman.
    The market sees a two-in-three chance of another hike from
Canada's central bank in October, overnight index swaps figures
    At 4 p.m. EDT (1800 GMT), the Canadian dollar          was
up 0.8 percent at C$1.2579 per U.S. dollar, or 79.50 U.S. cents.
    The currency's weakest level of the session was C$1.2691,
while it touched its strongest since Aug. 4 at C$1.2558.    
    Adding to support for the loonie, prices of oil       , one
of Canada's major exports, rose 3 percent as U.S. drillers cut
rigs and the greenback fell.             
    The U.S. dollar        retreated against a basket of
currencies as the ouster of White House senior adviser Steve
Bannon kept investors jittery about the outlook for President
Donald Trump's agenda.             
    For the week, the loonie gained 0.8 percent. Still, data
from the U.S. Commodity Futures Trading Commission and Reuters
calculations showed that speculators have pared bullish bets on
the currency.
    Canadian dollar net long positions fell to 51,349 contracts
as of Aug. 15, after reaching 62,821 contracts a week earlier,
the highest since January 2013.
    Canadian government bond prices were lower across much of
the yield curve, with the 10-year             falling 19
Canadian cents to yield 1.870 percent.
    The gap between the 10-year yield and its U.S. equivalent
narrowed by 2.5 basis points to a spread of -32.4 basis points.

 (Reporting by Fergal Smith; Editing by W Simon and Lisa
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