Canadian dollar pares some gains as data reduces rapid rate hike risk

TORONTO (Reuters) - The Canadian dollar pared some gains against its U.S. counterpart on Friday after domestic data indicated the country’s central bank does not have to raise rates rapidly.

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

Canada’s annual inflation rate rose to 1.4 percent last month from 1.2 percent in July. That was slightly below economists’ forecasts of 1.5 percent, although two out of three of the central bank’s core inflation measures also increased.

Retail sales rose 0.4 percent in July, topping economists’ expectations for a gain of 0.1 percent, but volumes showed a 0.2 percent decline.

“The Bank (of Canada) is going to be looking at the retail data as maybe an indication that they don’t need to go on an exceptionally quick path toward normalization,” said Andrew Kelvin, senior rates strategist at TD Securities. “It’s not so weak a print that it’s going to preclude further tightening this year.”

The central bank raised rates earlier in September for the second time in three months after Canada’s economic growth accelerated this year.

Chances of another rate hike in October edged lower, to 38 percent from 42 percent before the data, the overnight index swaps market indicated.

At 9:23 a.m. EDT (1323 GMT), the Canadian dollar CAD=D4 was trading at C$1.2310 to the greenback, or 81.23 U.S. cents, up 0.1 percent.

The currency traded in a range of C$1.2255 to C$1.2334.

Modest gains for the loonie came as the U.S. dollar .DXY buckled against the yen amid simmering tensions on the Korean peninsula.

The price of oil, one of Canada’s major exports, dipped as investors waited to see whether major producers meeting in Vienna would back an extension to output cuts beyond March.

U.S. crude CLc1 was down 0.26 percent at $50.42 a barrel.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR gained 3.5 Canadian cents to yield 1.574 percent, and the 10-year CA10YT=RR climbed 21 Canadian cents to yield 2.096 percent.

The gap between Canada’s two-year yield and its U.S. equivalent narrowed by 1 basis point to 13.9 basis points.

Reporting by Fergal Smith; Editing by Lisa Von Ahn