August 20, 2010 / 12:33 PM / 7 years ago

C$ hits 1-month low as CPI, global fears weigh

TORONTO (Reuters) - The Canadian dollar slid to a one-month low against the U.S. dollar on Friday as risk appetite soured over revived fears of slowing global growth and domestic inflation data came in below market expectations.

Canadian consumer prices charged higher in July as new sales taxes took effect in Ontario and British Columbia, but underlying inflation remained tame, fueling doubts about how fast the Bank of Canada would continue to raise interest rates as the recovery loses steam.

The currency slid as low as C$1.0515 to the U.S. dollar, or 95.10 U.S. cents, its lowest level since July 20. It closed at C$1.0488, or 95.35 U.S. cents, down from C$1.0399 to the U.S. dollar or 96.16 U.S. cents on Thursday.

“The soft inflation numbers for Canada just added further weight to the notion that the Bank of Canada would have to go on hold on rates at some point soon and that’s a negative for the Canadian dollar,” said Avery Shenfeld, chief economist at CIBC World Markets.

The consumer price index rose 0.5 percent in July, 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.

A poll conducted by Reuters after the data showed Canada’s primary securities dealers still predict the central bank will raise interest rates for a third time this year in September, but uninspiring economic data has cast doubt on the pace of future increases.

The Canadian dollar, however, was already weaker heading into the inflation report, as investors dumped stocks, commodities and commodity-linked currencies following Thursday’s poor U.S. jobs and manufacturing numbers.

As well, comments from Axel Weber, a member of the European Central Bank’s governing council, who said on Friday the ECB should extend its loose monetary stance, were viewed as suggesting more weakness ahead in the euro zone and fueled investor worries.

“Weber’s comments from the ECB, who we generally think of as being a hawk -- he actually sounded fairly dovish -- so I think that drove some euro weakness and then obviously the inflation data for Canada kind of sealed it for a weak Canada performance,” said Camilla Sutton, senior currency strategist at Scotia Capital.

The currency was down about 0.7 percent for the week even though it rallied on Tuesday and Wednesday on the takeover bid for Potash Corp by BHP Billiton.

Details of the offer released on Friday confirmed that payments would be made in U.S. dollars, which would still support the Canadian currency as a sizable amount could be expected to be converted by Canadian shareholders.

“It’s not what the denomination is of the initial check, it’s where the recipients reside and what currency they then put the money,” said CIBC’s Shenfeld. “It was only going to be a proportion of the total purchase price in any event.”

BONDS RALLY AFTER SOFT CPI

Most government bond prices, especially at the short end of the yield curve, jumped after the lower than expected inflation data led investors to bet the Bank of Canada would pause in its rate-hike campaign this year.

“Given that there was going to be a lot of volatility with the HST (harmonized sales tax) in terms of this number, the bond market really wasn’t sure what to make of it,” said David Tulk, senior macro strategist at TD Securities.

“They certainly focused in on what core inflation was showing because that was a lot less than what people had expected, and the bond market saw cause to rally.”

Canada’s two-year bond rose 13 Canadian cents to yield 1.3 percent, while the 10-year bond was up 7 Canadian cents to yield 2.913 percent.

With additional reporting by Jeffrey Hodgson; editing by Rob Wilson

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