August 20, 2010 / 12:33 PM / 10 years ago

CANADA FX DEBT-C$ sags to 1-month low after soft CPI

 * C$ falls to 95.17 U.S. cents
 * July consumer prices rise 1.8 percent
 * Bonds up after CPI up less than expected
 TORONTO, Aug 20 (Reuters) - The Canadian dollar slid to a one-month low versus the U.S. dollar on Friday after Canadian inflation data came in below market expectations.
 A spike in energy costs and a new consumption tax in some provinces pushed up Canada’s annual inflation rate to 1.8 percent in July from 1.0 percent in June, but still put little pressure on the central bank to raise interest rates, which weighs on the Canadian dollar. [ID:nN20500487]
 Canada’s currency CAD=D4 depreciated to as much as C$1.0508 to the U.S. dollar, or 95.17 U.S. cents, its weakest since July 20. That was well off Thursday’s close at C$1.0399 to the U.S. dollar or 96.16 U.S. cents.
  The consumer price index rose 0.5 percent in the month, following a 0.1 percent fall in June. Analysts in a Reuters poll had forecast a 0.6 percent monthly rise for an annual rate of 1.9 percent.
  Core CPI, which excludes volatile items and the effects of tax changes, fell by 0.1 percent on the month after decreasing by 0.1 percent in June.
 “We were thinking overall that the report would have been stronger than expected and instead it’s weaker than expected and really it is rare core CPI declines two consecutive months, that is something the bank will definitely notice,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank of Canada.
 “We’ll assume that given that report, the loonie may lose some ground.”
 At 8:04 a.m. (1204 GMT), the currency stood at C$1.0495 to the U.S. dollar, or 95.28 U.S. cents.
 The Canadian dollar was already weaker heading into the inflation report, as investors steered clear of riskier assets on Friday amid growing concerns about slackening growth in the U.S. economy. [MKTS/GLOB]
 Data on Thursday showed U.S. jobless claims at a nine-month high and the first contraction in a year in a volatile U.S. regional manufacturing index. [ID:nN19350083]
 In Canada, worse than foreseen wholesale trade and leading indicator figures added to worries that the economy is slowing, pressured by a cooling housing sector. [ID:nN19260847]
 The bad news snapped a two-day rally earlier in the week spurred by the announcement of a takeover bid for Canada’s Potash Corp POT.TO by BHP Billiton BLT.L (BHP.AX).
 Canada’s government bond prices were firmer after the data as investors bet the Bank of Canada would take a pass at raising interest rates, after lifting them twice since the start of June.
 Market expectations of an interest rate hike in September deflated to about 39 percent after the data from around 54 percent, as reflected in yields on overnight index swaps. BOCWATCH
 Canada’s two-year bond CA2YT=RR rose 13 Canadian cents to yield 1.302 percent, while the 10-year bond CA10YT=RR jumped 32 Canadian cents to yield 2.885 percent.   (Reporting by Claire Sibonney and Ka Yan Ng, Editing by Chizu Nomiyama)                                                      

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