CANADA FX DEBT-C$ retreats a bit more; focus on central bank
* Canadian dollar at C$1.0979 or 91.08 U.S. cents * Bond prices higher across the maturity curve * Focus on Bank of Canada, CPI next week (Updates to close) By Andrea Hopkins TORONTO, April 11 (Reuters) - The Canadian dollar eased for a second session on Friday after strong gains earlier in the week, hurt by a slide in global stock markets and firm U.S. economic data, as the market turned its attention to Wednesday's Bank of Canada policy statement. Global equity markets fell as fears on Wall Street about over-stretched stock valuations spread to Asia and Europe, pushing investors to the safety of bonds. Traders cited contagion from the correction in the United States, though some said a positive stock market trend is still intact. U.S. data showed producer prices had their largest increase in nine months in March. The morning report helped the U.S. dollar trim some declines, putting further pressure on the loonie. Focus in the Canadian dollar market was trained on Wednesday's Bank of Canada's policy statement and Thursday's Canadian consumer price index (CPI) report for March. "We had a round of U.S. dollar strength (based on) a bunch of headlines close together - everything from weaker earnings in the U.S. to headlines about Ukraine - to just a bit of give-back into the weekend after a week of U.S. dollar weakness," said Camilla Sutton, chief currency strategist at Scotiabank. "So we're closing slightly lower in the Canadian dollar and as we go into next week, when we have CPI and Bank of Canada - an important fundamental week." The Canadian dollar ended the North American session at C$1.0979 to the greenback, or 91.08 U.S. cents, weaker than Thursday's close of C$1.0929, or 91.50 U.S. cents. Sutton said she expects the currency to stick close to C$1.10 until it gets direction from the central bank or from the inflation data. The CPI report is expected to show prices were up 0.4 percent in March from February and up 1.4 percent year-over-year. Such an inflation reading would help further ease fears of disinflation and eliminate residual concern that the central bank might have to cut rates. "The risk is on both inflation and Bank of Canada and I think we're likely to stay close to C$1.10 leading into that as the market is a bit nervous," she said. Analysts polled by Reuters this week unanimously forecast the central bank will keep interest rates on hold when it releases its interest-rate policy statement and quarterly Monetary Policy Report on Wednesday. But it may forecast a slightly higher profile for inflation. The poll predicted rates won't go up until the third quarter of 2015. A more dovish central bank tone hit the loonie hard in the past few months and markets will be watching to see if its stance changes. Since hitting a 4-1/2 year low in mid-March, the Canadian dollar has climbed about 3 percent, but it gave back some gains over the last two days. Some recent signs of strength in the domestic economy, as well as a weaker U.S. dollar were responsible for boosting sentiment for the loonie after the intense selling pressure it came under earlier in the year. Many analysts don't expect the gains to last. "With the surprising strength in the loonie over the last week or so, we got to an area where, in the short term, the loonie is overvalued, in my opinion," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary. "I think with the rally that we've seen over the last couple weeks, we could see that fade more and I don't think it's a far stretch to say we could be back at C$1.10 to C$1.11." The central bank's policy statement poses a risk for the loonie as the more positive sentiment for the currency recently could set some investors up for disappointment if the central bank maintains its dovish tone, Smith said. Canadian government bond prices were higher across the maturity curve, with the two-year up 1.8 Canadian cents to yield 1.045 percent and the benchmark 10-year up 44 Canadian cents to yield 2.394 percent. (Additional reporting by Leah Schnurr; editing by Peter Galloway)
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