May 18, 2018 / 1:36 PM / 3 months ago

CANADA FX DEBT-C$ weakens as BoC rate hike bets ebb on cooler inflation

    * Canadian dollar at C$1.2896, or 77.54 U.S. cents
    * Loonie falls 0.7 percent
    * Canada's inflation rate cools to 2.2 percent in April
    * Bond prices higher across the yield curve

    TORONTO, May 18 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Friday after
weaker-than-expected domestic inflation dampened prospects of
another Bank of Canada interest rate hike as early as this
month.
    Canada's annual inflation rate cooled modestly to 2.2
percent in April, short of economist expectations for 2.3
percent, as consumers paid less for travel services and gasoline
prices moderated, data from Statistics Canada showed.
            
    Still, two out of three of the central bank's core inflation
measures rose and separate data showed that Canadian retail
sales rose by the most in five months.
    It fits with the Bank of Canada's view that it is going to
have to raise interest rates further but "inflation isn't really
pushing them to do it in a really fast way that would
destabilize the household sector," said Nathan Janzen, senior
economist at Royal Bank of Canada.
    The central bank has raised its benchmark interest rate
three times since July to leave it at 1.25 percent. Chances of
another hike at the May 30 announcement sank to 35 percent from
nearly 50 percent before the data.           
    At 9:21 a.m. ET (1321 GMT), the Canadian dollar          was
trading 0.7 percent lower at C$1.2896 to the greenback, or 77.54
U.S. cents. The currency touched its weakest since Tuesday at
C$1.2909.
    Declines for the loonie came as the top U.S. trade official
on Thursday poured cold water on the prospect of an imminent
breakthrough in talks to rework the North American Free Trade
Agreement hours after Canada's prime minister struck a positive
note.             
    Canada sends about 75 percent of its exports to the United
States so its economy could benefit if a deal is reached.
    The price of oil, one of Canada's major exports, edged lower
after reaching on Thursday its highest in three-and-a-half
years. U.S. crude        prices were down 0.2 percent at $71.34
a barrel.                 
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 5.5 Canadian cents to
yield 2.035 percent and the benchmark 10-year             rising
22 Canadian cents to yield 2.494 percent.
    On Thursday, the 10-year yield touched its highest in more
than four years at 2.537 percent.

 (Reporting by Fergal Smith
Editing by Nick Zieminski)
  
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