May 20, 2011 / 8:35 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 closing prices, BMO rate hike forecast)
 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 slide by commodity prices, signaled to the market that
the central bank will keep its key rate at 1 percent for some
 The Bank of Canada raised 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.
 The currency CAD=D4 slid as low as C$0.9772 to the U.S.
dollar, or $1.0233, following the Canadian data.
 By 4 p.m. (2000 GMT) it had pared some losses to trade at
C$0.9730 to the U.S. dollar, or $1.0277, down from Thursday's
close at C$0.9682 to the U.S. dollar, or $1.0328.
 Both the market and the central bank had expected overall
inflation to stay elevated. Governor Mark Carney predicted on
Monday that inflation would remain above the bank's target
range 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 (data) was decidedly soft and that's
a good part of what's happening both in credit and currency
markets in Canada."
 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.
 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 58 Canadian
cents to yield 3.147 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 cut their bets on rate hikes at every Bank of Canada
announcement date from July to December. BOCWATCH
 Almost no one expects the central bank to hike rates at its
next policy setting on May 31. [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.
 (With additional reporting by Jeffrey Hodgson; editing by Rob

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