CANADA FX DEBT-Loonie steady after touching 5-1/2 month high

Fri Jun 27, 2014 10:06am EDT

* Canadian dollar at C$1.0687 or 93.57 U.S. cents
    * Bond prices higher across the maturity curve

    By Leah Schnurr
    TORONTO, June 27 (Reuters) - The Canadian dollar pulled back
from a 5-1/2-month high hit overnight and was little changed
against the greenback on Friday, with only minor movement
expected through the day as the market looked set to take a
breather.
    After a quiet week for domestic economic data, investors
took in figures on Friday that showed Canadian industrial
product prices fell unexpectedly last month, largely due to
cheaper energy and a stronger currency. The loonie had little
reaction to the report. 
    What started as a rally last week on surprisingly strong
domestic inflation data has gained traction this week as the
loonie has broken through some key technical levels and has
benefited from U.S. dollar weakness.
    "Up until earlier this week, it was a very fundamental move
and then the last couple days has really been a broader U.S.
dollar move, combined with probably some late short-covering,"
said Camilla Sutton, chief currency strategist at Scotiabank in
Toronto.
    "Right now, we're sitting with a much stronger Canadian
dollar than we started the week ... and the market is just
digesting all of that."
    The Canadian dollar was on track to have risen in four out
of five sessions this week and was up 0.7 percent on the week
against its U.S. counterpart.
    The Canadian dollar was at C$1.0687 to the
greenback, or 93.57 U.S. cents, slightly stronger than
Thursday's close of C$1.0693, or 93.52 U.S. cents. 
    The loonie touched a high of C$1.0677 overnight, its highest
level since early January. That was likely to be the high for
the session, Sutton said.
    Last week's strong inflation reading has put focus on the
Bank of Canada's next policy announcement on July 16 because the
bank's governor, Stephen Poloz, has repeatedly flagged concerns
about a weak inflation environment.
    While analysts say the central bank is unlikely to shift
away from its neutral stance quickly, markets will watch for any
mention of what impact the stronger Canadian dollar is having.
     "I suspect at these levels, Governor Poloz will highlight
the impact of the strong Canadian dollar on both the export
sector, as well as inflation through lower import costs, so that
will open the door as an offset to the recent inflation prints
we've had," Sutton said.
    "If we go into July 16 and have a Canadian dollar still
sitting below C$1.07, I suspect he will be very cautious."
    Canadian government bond prices were higher across the
maturity curve, with the two-year up half a Canadian
cent to yield 1.107 percent, and the benchmark 10-year
 up 13 Canadian cents to yield 2.229 percent.

 (Editing by Peter Galloway)
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