CANADA FX DEBT-Loonie bounces after rout as inflation rises

Fri Jan 24, 2014 10:00am EST

* Canadian dollar at C$1.1078 or 90.27 U.S. cents
    * Bond prices mixed across the maturity curve

    By Leah Schnurr
    TORONTO, Jan 24 (Reuters) - The Canadian dollar firmed
against the greenback on Friday, bouncing back from a 4-1/2-year
low in the previous session after data showed Canada's annual
inflation rate rose in December.
    The inflation rate was 1.2 percent on an annualized basis
last month, slightly lower than the 1.3 percent analysts had
predicted, but up from 0.9 percent in November.
    Core inflation - which strips out volatile items and is
closely watched by the Bank of Canada - edged up to an
annualized 1.3 percent as expected from 1.1 percent in November.
 
    The inflation report had garnered more attention from
markets than usual after the Bank of Canada earlier in the week
said it was more worried about persistently low inflation than
it was three months ago.
    The stabilization in the loonie, which has been one of the
underperformers among major currencies in 2014, came in the
midst of a flight from risky assets that hit emerging market
currencies. 
    "The Canadian dollar held up remarkably well overnight when
there was a wave of risk-off sentiment that drove the likes of
the Australian dollar lower," said Shaun Osborne, chief currency
strategist at TD Securities in Toronto.
    The Canadian dollar was at C$1.1078 to the
greenback, or 90.27 U.S. cents, stronger than Thursday's close
of C$1.1099, or 90.10 U.S. cents.
    The Canadian dollar tumbled to its lowest level since July
2009 on Thursday in the wake of dovish comments from the Bank of
Canada earlier in the week. Expectations the central bank could
become more accommodative have weighed heavily on the currency
of late, with the greenback appreciating by more than 4 percent
against the loonie in the first three weeks of the year.
    As well as flagging the weak inflation environment, the Bank
of Canada on Wednesday noted the stimulative impact on exports
from the Canadian dollar's recent depreciation, though the
central bank also said the currency was still strong and that
its strength still posed an obstacle to exports. 
    Some of Friday's snap-back could be due to some
profit-taking and investors covering their short positions in
the Canadian dollar, said Osborne, but he doesn't think the
trend of the weaker loonie is over yet.
    "We may settle into something of a range until we determine
the next move, but with the Bank leaning dovishly and Governor
Poloz making it very, very, very clear to markets that he's not
unhappy with the weakness in the Canadian dollar, I still rather
think we've got a ways to go on this journey yet before we see
the Canadian dollar stabilize."
    Canadian government bond prices were mixed across the
maturity curve, with the two-year up half a Canadian
cent to yield 0.966 percent, its lowest level since May 2013.
The benchmark 10-year was up 11 Canadian cents to
yield 2.391 percent.
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