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

Fri Mar 21, 2014 4:31pm EDT

* Canadian dollar at C$1.1210 or 89.21 U.S. cents
    * Bond prices mostly higher across the maturity curve

 (Adds details, quotes, updates prices)
    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.
    Although 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. 
    "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 the 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.
    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.
 
    The Canadian dollar was hit hard earlier in the week by
comments by Poloz that were more dovish than expected. The
comments, in which Poloz left the door open to a potential cut
in interest rates, and uncertainty about when the United States
might raise rates, helped take the loonie to a 4-1/2 year low on
Thursday.
    "Even though on balance the data released today didn't
change the overall story and the medium- and longer-term picture
for the Canadian dollar, what it does do is ease some of the
selling pressure we've seen the last couple of days with
sentiment turning so bearish," said Scott Smith, senior market
analyst at Cambridge Mercantile Group in Calgary.
    "The overall story is we're still in a depressed
inflationary environment," Smith said.
    The currency also got a boost from a strong increase in
retail sales in January as the economy shook off some of the
weather-related effects that had depressed activity in December.
    The Canadian dollar ended the North American
session at C$1.1210 to the greenback, or 89.21 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.
    For the week, the U.S. dollar appreciated by 1 percent
against the loonie. This week's drop took the Canadian dollar
below the key C$1.12 area for the first time since late January.
    "If we attack the C$1.1270 area, that will be the first
level of resistance," Smith said. "If we can break that, there's
a lot of room to run. If we vault C$1.13, we could potentially
be in C$1.14 pretty fast."
    Investors also took in comments from a number of U.S.
Federal Reserve policymakers on Friday, two days after Fed Chair
Janet Yellen surprised markets by signaling a potentially faster
timetable for raising rates than had been anticipated. 
    St Louis Federal Reserve President James Bullard said Yellen
was likely just repeating the views of private analysts and
investors when she said the central bank could raise interest
rates six months after ending a bond-buying program.
 
    Earlier on Friday, Minneapolis Federal Reserve Bank
President Narayana Kocherlakota 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 falls to at least
6.5 percent. 
    Canadian government bond prices were mostly higher across
the maturity curve, though the two-year was off half
a Canadian cent to yield 1.075 percent. The benchmark 10-year
 was up 14 Canadian cents to yield 2.485 percent.

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