TORONTO (Reuters) - The Canadian dollar closed lower versus the U.S. dollar on Thursday, handing back more than half Wednesday’s gains as weak inflation data solidified expectations of a 50-basis-point interest rate cut from the Bank of Canada next week.
Domestic bond prices closed mostly lower as a slide in the bigger U.S. Treasury market influenced the direction for the Canadian market, whose fall was cushioned by the weak data.
The Canadian dollar closed at C$1.0122 to the U.S. dollar, or 98.79 U.S. cents, down from C$1.0014 to the U.S. dollar, or 99.86 U.S. cents, at Wednesday’s close.
Thursday’s data showed core inflation slowed more than expected in March to 1.4 percent, its lowest since July 2005 and below the central bank’s 2 percent target.
The Canadian currency climbed above the greenback immediately after the figures were released, but slipped back below it as North American investors arrived at their offices.
It was the Canadian currency’s first stint above parity versus the U.S. dollar in almost a month. But the currency remains locked in the range it has occupied for months.
“The data essentially solidified the outlook for another 50 basis point easing at the next meeting and probably got rid of anyone who was doubting it to begin with,” said David Powell, currency analyst at IDEAglobal in New York.
A Reuters poll showed a large majority of Canada’s primary securities dealers expect the Bank of Canada to cut its key interest rate by 50 basis points to 3 percent when it sets rates on April 22.
Powell said a stronger U.S. dollar magnified the fall in the Canadian dollar, whose 1.07 percent drop on Thursday was its biggest percent drop in a session since March 20.
Friday’s Canadian data are wholesale trade figures for February and March leading indicators, but neither report is expected to alter rate expectations.
Canadian bond prices mostly followed the U.S. Treasury market lower given signs that some investors expect the U.S. Federal Reserve may not have to cut interest rates much further.
U.S. interest rate futures point to a Fed rate cut of 25 basis points at the April 29-30 meeting, while odds of a deeper 50-basis-point rate have been slashed to 18 percent.
“We are continuing in a period here where maybe the (U.S.) recession is not unfolding as deeply as before,” said Michael Gregory, senior economist at BMO Capital Markets. “So there seemed to be a little bit of a correction in the U.S. bond market and I think that just filtered across the border.”
The two-year bond dropped 12 Canadian cents to C$101.87 to yield 2.831 percent. The 10-year bond slipped 7 Canadian cents to C$102.45 to yield 3.680 percent.
The yield spread between the two- and 10-year bonds was 84.9 basis points, down from 88.5 at the previous close.
The 30-year bond gained 10 Canadian cents to C$114.25 to yield 4.151 percent. In the United States, the 30-year treasury yielded 4.519 percent.
The three-month when-issued T-bill yielded 2.55 percent, down from 2.56 percent at the previous close.
Editing by Janet Guttsman