CANADA FX DEBT-Loonie bounces after rout as inflation rate rises

Fri Jan 24, 2014 4:26pm EST

* Canadian dollar at C$1.1073 or 90.31 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 from a 4-1/2-year low
in the previous session as the loonie benefited from the global
flight from risky assets and as the domestic inflation rate
rose.
    The stabilization in the loonie, which has been one of the
underperformers among major currencies in 2014, came as
investors sold stocks and emerging market currencies in the
midst of a mix of country-specific problems and worries that
reduced bond-buying from the U.S. Federal Reserve reduces the
liquidity that has boosted emerging market assets. 
    "People are worried about contagion. It's not a huge issue
at the moment, it's like a small crack in the window," said
Rahim Madhavji, president at Knightsbridge FX.com in Toronto.
    "Canada does have a triple-A status, and that is something
that is going to support the loonie, all else being equal." 
    The loonie also got some relief from data that showed    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.
    The inflation report 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.
    "It's slightly below what the consensus number was, but
despite that, it wasn't anything worse, which would have really
hurt the loonie," said Madhavji.
    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 Canadian dollar ended the North American
session at C$1.1073 to the greenback, or 90.31 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 Shaun Osborne, chief currency
strategist at TD Securities in Toronto. Still, 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, with the
two-year off half a Canadian cent to yield 0.971
percent. The benchmark 10-year was up 3 Canadian
cents to yield 2.401 percent.
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