CANADA FX DEBT-Loonie weakens after Canada inflation data, Fed eyed

Fri Sep 20, 2013 10:00am EDT

* C$ at C$1.0289 against U.S. currency
    * Canadian inflation down a tad, as expected, in August
    * Canadian bond prices mostly higher across the curve

    By Leah Schnurr
    TORONTO, Sept 20 (Reuters) - The Canadian dollar weakened on
Friday as investors tried to gauge how long the U.S. central
bank will keep its economic stimulus in place, while an
inflation report at home reinforced the view Canadian interest
rates will stay low for some time.
    Canada's annual inflation rate edged down in August to 1.1
percent from 1.3 percent in July, as expected, giving the Bank
of Canada plenty of space to remain accommodative.
 
    The central bank is expected to keep its benchmark interest
rate on hold at 1.0 percent - where it has been since September
2010 - well into next year, as long as inflation is muted.
 
    "The implication from that is that the Bank of Canada should
have lots of breathing room to remain sidelined to nurture the
broader economic recovery," said Mazen Issa, macro strategist at
TD Securities. 
    For the most part, the report did not change expectations
that the central bank will keep rates steady at its next meeting
in October. 
    The Canadian dollar was at C$1.0289 to the U.S.
dollar, or 97.19 U.S. cents, weaker than Thursday's session
close of C$1.0262, or 97.45 U.S. cents. 
    Investors continued to digest a decision from the U.S.
Federal Reserve earlier in the week to maintain its $85 billion
a month in bond purchases, a move which surprised economists and
investors who had expected the Fed to modestly reduce the amount
of purchases.
    The Canadian dollar surged in the immediate aftermath of the
announcement, touching a three-month high, but has pulled back
since. By Friday, the U.S. dollar was edging off its lows and
was up 0.1 percent against a basket of currencies.
    "At this point there's questions about more transparency,
and what exactly (Fed Chairman Ben) Bernanke's thinking was in
terms of the Fed's quantitative easing program still remains
elusive," said Issa.
    "There may be some hesitancy to take any outsized
positions." 
    Analysts will be scrutinizing a round of speeches from Fed
members scheduled for Friday for further insight into how much
longer the Fed will continue stimulus. 
    St. Louis Fed President James Bullard said in an interview
early Friday the Fed could still reduce its bond buying at its
meeting in October if data points to a stronger economy.
 
    Prices for Canadian government bonds were mostly higher
across the maturity curve, with the two-year bond up
4 and a half Canadian cents to yield 1.232 percent, and the
benchmark 10-year bond was unchanged to yield 2.713
percent.
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