June 19, 2019 / 1:53 PM / a month ago

CANADA FX DEBT-Loonie rallies as hotter inflation clips rate cut bets

    * Canadian dollar gains 0.2% against the greenback
    * Canada inflation rate rises in May to a 7-mth high at 2.4%
    * Loonie touches its strongest since Friday at 1.3337
    * Canada-U.S. 2-yr spread at narrowest since March 2018

    By Fergal Smith
    TORONTO, June 19 (Reuters) - The Canadian dollar
strengthened to a five-day high against its U.S. counterpart on
Wednesday, as investors reduced bets on a Bank of Canada
interest rate cut this year after domestic data showing
greater-than-expected inflation.
     Canada's annual inflation rate rose to 2.4% in May, its
highest in seven months, while two of the Bank of Canada's three
core measures of inflation also climbed, Statistics Canada data
indicated. Analysts had expected the annual rate to edge up to
2.1% from 2.0% in April.             
    "If you're looking to see if the Bank of Canada is easing
anytime soon, forget it," said Derek Holt, vice president of
capital markets economics at Scotiabank. "Inflation is on
target, not signaling any big urgency to ease policy."
    Chances of a Bank of Canada interest rate cut this year fell
to less than 40% from about 50% before the data, the overnight
index swaps market indicated.           
    At 9:12 a.m. EDT (1312 GMT), the Canadian dollar          
traded 0.2% higher at 1.3355 to the greenback, or 74.88 U.S.
cents. The currency, which was boosted on Tuesday by the revival
of trade talks between the United States and China, touched its
strongest since last Friday at 1.3337.             
    Gains for the loonie on Wednesday came as investors awaited
an interest rate decision from the U.S. Federal Reserve. The Fed
is expected to leave borrowing costs unchanged but possibly lay
the groundwork for a rate cut later this year.                  
    The price of oil, one of Canada's major exports, fell as
data suggesting a smaller-than-expected fall in U.S. crude
inventories countered support from hopes for a U.S.-China trade
deal. U.S. crude oil futures        were down 0.5% at $53.64 a
barrel.                      
    Canadian government bond prices were lower across the yield
curve, with the two-year            price down 12 Canadian cents
to yield 1.468% and the benchmark 10-year             falling 60
Canadian cents to yield 1.486%.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 2.5 basis points to a spread of 43.4
basis points in favor of the U.S. bond, its smallest gap since
March 2018.
    Separate Canadian data showed that home prices climbed for
the first time in nine months in May as the housing market
benefited from lower borrowing costs and from an economy that
was adding jobs.             

 (Additional reporting by Tyler Choi; Editing by Jeffrey Benkoe)
  
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