CANADA FX DEBT-C$ firms, helped by rise in producer prices

Mon Feb 3, 2014 9:55am EST

* Canadian dollar at C$1.1059 or 90.42 U.S. cents
    * Bond prices lower across the maturity curve

    By Leah Schnurr
    TORONTO, Feb 3 (Reuters) - The Canadian dollar strengthened
against the greenback on Monday to its highest level in a week,
helped by a bigger than expected rise in producer prices and as
investors consolidated after recent declines.
    The recent weakness in the Canadian dollar helped producer
prices rise by 0.7 percent in December, data showed, with higher
energy prices also contributing to the gain. Economists had
forecast an increase of 0.3 percent. Raw materials prices also
rose. 
    "Those are both leading indicators of what we can expect
with inflation down the road, so with those being on the hotter
side of things, it's a welcome development when we've had any
sort of inflation in terms of consumer prices be on the soggy
side of expectations lately," said Scott Smith, senior market
analyst at Cambridge Mercantile Group in Calgary.
    The Bank of Canada said late last month that it has become
more concerned about weak inflation. Expectations that the
central bank will likely keep policy to the dovish side, has
sparked a sell-off in the loonie in recent months.
    In monetary policy parlance, a dovish central bank would not
be keen to raise interest rates. Higher interest rates
customarily strengthen free-floating currencies, such as the 
Canadian dollar, because deposits would yield higher returns.
     "While producer prices and raw materials aren't really top
tier economic data and the Bank of Canada probably doesn't put a
big weight on them, it does bode well in terms of the overall
outlook for inflation moving forward and how the Bank of Canada
will react to that," said Smith.
    The data was the first release in a busy economic calendar
this week, which will culminate in the closely watched
unemployment report on Friday. Hiring is expected to pick up in
January after the economy unexpectedly shed jobs the month
before. 
    The Canadian dollar was at C$1.1059 to the
greenback, or 90.42 U.S. cents, stronger than Friday's close of
C$1.1138, or 89.78 U.S. cents.
    The currency had notched fresh 4-1/2-year lows in each of
the past four sessions. In the first month of the year, the U.S.
dollar appreciated by nearly 5 percent against the loonie.
    The Canadian dollar briefly broke through the
psychologically important C$1.12 area on Friday before bouncing
back higher. That the currency was not able to sustain the move
past C$1.12 helped the loonie gain some strength on Monday, said
Smith.
    "The trade has been a little crowded for a while, we needed
a little washout and reset," said Smith. "So it's along the
lines that we expect a little bit of a consolidation here until
we see the catalyst for the next move higher" for the U.S.
dollar-Canadian dollar pairing.
    The Canadian dollar saw limited reaction to data overseas
that pointed to a weak start to the year for China's economy as
business conditions for manufacturers worsened in January.
Still, euro zone factories saw their best month since mid-2011.
 
    Canadian government bond prices were lower across the
maturity curve, with the two-year off 3 Canadian
cents to yield 0.965 percent and the benchmark 10-year
 down 27 Canadian cents to yield 2.374 percent.
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