CANADA FX DEBT-C$ strengthens as inflation higher than expected

Fri Mar 21, 2014 9:51am EDT

* Canadian dollar at C$1.1199 or 89.29 U.S. cents
    * Bond prices higher across the maturity curve

    By Leah Schnurr
    TORONTO, March 21 (Reuters) - The Canadian dollar got a
reprieve from recent heavy selling and firmed against the
greenback on Friday after data showed that inflation was higher
than expected last month, while retail sales rebounded in
January.
    While the annualized inflation rate slowed to 1.1 percent in
February from 1.5 percent the previous month, it beat
expectations for a 0.9 percent rise in consumer prices.
     The loonie touched a session high shortly after the data
was released as the market saw the number as relieving pressure
on the Bank of Canada to cut interest rates. The bank has
signaled concern about the weak inflation environment 
    Economists had anticipated that a jump in prices in February
of last year would skew the yearly comparison. Bank of Canada
Governor Stephen Poloz said earlier in the week that he expected
lower February inflation because of that base effect.
 
    "Inflation is still low, but at least we've moved into the
(central bank's) target range, so that will probably ease some
of that discussions of the need for Bank of Canada to maybe
introduce some rate cuts, and with that it should provide a bit
of support for the Canadian dollar," said Paul Ferley, assistant
chief economist at Royal Bank of Canada in Toronto.
    The Canadian dollar was hit hard earlier in the week by more
dovish-than-expected comments by Poloz, who left the door open
to a potential cut in interest rates. Poloz's comments, combined
with uncertainty about when the United States may raise rates,
helped take the loonie to a 4-1/2 year low on Thursday.
    The currency also got a boost from a strong increase in
retail sales for January as the economy shook off some of the
weather-related effects that had depressed activity in December.
    The Canadian dollar was at C$1.1199 to the
greenback, or 89.29 U.S. cents, stronger than Thursday's close
of C$1.1242, or 88.95 U.S. cents. The loonie touched a session
high of C$1.1174.
    Investors will be watching comments from a number of U.S.
Federal Reserve policymakers on Friday, just two days after Fed
Chair Janet Yellen surprised markets by signaling a potentially
faster timetable for raising rates than had been anticipated. 
    Minneapolis Federal Reserve Bank President Narayana
Kocherlakota earlier on Friday said the Fed should have promised
to keep rates near zero until U.S. unemployment falls below 5.5
percent, as long as inflation and financial stability risks are
contained. 
    Kocherlakota was the sole dissenter to the Fed's policy
decision this week, which dropped its promise to keep rates at
ultra-low levels until the unemployment rate fell to at least
6.5 percent. 
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 1-1/2 Canadian
cents to yield 1.064 percent and the benchmark 10-year
 up 6 Canadian cents to yield 2.494 percent.

 (Additional reporting by Allison Martell, Editing by Peter
Galloway)
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