May 20, 2011 / 5:00 PM / 9 years ago

CANADA FX DEBT-C$, yields fall as rate-hike likelihood fades

 * C$ slides as low as C$0.9772 , or $1.0233
 * Inflation below forecast, but above BoC target range
 * Canada retail sales stall in March
 (Updates prices, adds comments)
 By Ka Yan Ng
 TORONTO, May 20 (Reuters) - Canada's dollar drooped on
Friday and government bond prices ramped higher as unexpectedly
weak retail sales and inflation data reduced expectations that
the Bank of Canada will soon raise interest rates.
 The data, along with mixed economic reports from other
corners of the world, ongoing European debt concerns, and the
recent selloff in commodity prices, signaled to the market that
the Bank of Canada will keep its key rate at 1 percent for some
 The Bank of Canada hiked rates three times last year but
has stayed on the sidelines since September as it monitors the
economy's progress.
 "With persistent Canadian dollar strength, even at these
levels, and with the economic backdrops showing benign data ...
I don't think the Bank of Canada should be doing a thing," said
John Curran, senior vice president at CanadianForex.
 "With everything that's going on here globally, the
recovery that everybody's speaking of is still very fragile.
This still could turn downwards for many countries, including
 Canada's annual inflation rate stayed at 3.3 percent in
April, according to Statistics Canada data on Friday, again
above the Bank of Canada's target range of 1 to 3 percent.
 A second report showed retail sales were flat in March and
actually fell by 0.8 percent in volume terms from February, in
a much weaker showing than analysts had forecast.
 Both the market and the central bank had expected overall
inflation to stay elevated. Bank of Canada Governor Mark Carney
predicted on Monday that inflation would remain above the
target range of 1 to 3 percent throughout the second quarter
but said inflation expectations remained well-anchored.
 The steady inflation figure in April was in contrast to the
surprising jump in March, and a touch less than economists'
expectations of 3.4 percent
 "The CPI wasn't exciting really one way or the other. It
was pretty close to expectations," said Mark Chandler, head of
Canadian fixed income and currency strategy at RBC Capital
 "But the retail sales was decidedly soft and that's a good
part of what's happening both in credit and currency markets in
 He added the bond price move may also have been exaggerated
by concern around coupon reinvestments on June 1, a date on
which billions of dollars in bond interest is paid and
redeployed, as well as thinned-out markets ahead of a long
weekend in Canada.
 The currency  CAD=D4 slid as low as C$0.9772 to the U.S.
dollar, or $1.0233, following the Canadian data. At 12:21 p.m.
(1621 GMT), it had pared losses, and was at C$0.9719 to the
U.S. dollar, or $1.0289, down from Thursday's close at C$0.9682
to the U.S. dollar, or $1.0328.
 Canada's two-year bond CA2YT=RR, particularly sensitive
to Bank of Canada rate moves, jumped 16 Canadian cents to yield
1.607 percent. The 10-year bond CA10YT=RR rose 60 Canadian
cents to yield 3.145 percent.
 The falling yields reflected a reassessment of rate hike
expectations. Overnight index swaps, which trade based on
expectations for the central bank's key policy rate, showed
traders have cut their bets on rate hikes at every Bank of
Canada announcement date from July to December. BOCWATCH
 Few expect the central bank to hike rates at its next
policy setting on May 31 as well. [CA/POLL]
 "I would think right now the risk to our (interest rate
hike) call, if anything, is taking it out further for the year
as a whole," said Derek Holt, economist at Scotia Capital.
 "For now we're sticking to the October call, but with the
way we expect the rest of the year to unfold I think the tail
risk is later rather than sooner."
 Canadian markets are shut on Monday for Victoria Day.
 (Editing by Jeffrey Hodgson and Peter Galloway)

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