Canadian dollar hits five-week low as data supports gradual rate hike approach

TORONTO (Reuters) - The Canadian dollar weakened to its lowest in more than five weeks against the greenback on Friday after domestic data showing a slowdown in inflation suggested the Bank of Canada would be unlikely to speed up the pace of interest rate hikes.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, Ontario, Canada, January 23, 2015. REUTERS/Mark Blinch/File Photo/File Photo

The annual inflation rate in September dipped to 2.2 percent from 2.8 percent as price pressures from fuel and air travel eased. Analysts had forecast an annual rate of 2.7 percent.

The central bank’s three core inflation measures all fell, for the first time since November 2016.

“This should really quell a lot of speculation that the Bank of Canada will move away from the gradual path of tightening,” said Andrew Kelvin, senior rates strategist at TD Securities.

The central bank said in September that it had discussed dropping its gradual approach to raising rates. A faster pace of tightening could boost the loonie.

Money markets still expect the Bank of Canada to lift its policy rate by 25 basis points next week to 1.75 percent, but the amount of tightening seen by the end of 2019 slipped to 93 basis points from 96 basis points before the data. BOCWATCH

Separate data showed that the value of Canadian retail trade unexpectedly fell by 0.1 percent in August, the second decline in three months.

At 3:04 p.m. (1904 GMT), the Canadian dollar CAD=D4 was trading 0.2 percent lower at 1.3115 to the greenback, or 76.25 U.S. cents. The currency touched its weakest since Sept. 11 at 1.3132.

For the week, the loonie declined 0.7 percent. It was the third consecutive week the loonie lost ground.

The price of oil, one of Canada's major exports, rose on Friday on signs of surging demand in China, the world's second-biggest oil consumer. U.S. crude oil futures CLc1 settled 0.7 percent higher at $69.12 a barrel.

Still, the market declined for a second week on rising U.S. inventories and concern that trade wars were curbing economic activity.

Canadian government bond prices edged higher across much of a steeper yield curve, with the 10-year CA10YT=RR rising 5 Canadian cents to yield 2.493 percent.

The gap between the 10-year yield and its U.S. equivalent widened by 2.9 basis points to a spread of 70.5 basis points in favor of the U.S. bond, the biggest gap since July 24.

Reporting by Fergal Smith; Editing by Frances Kerry and Tom Brown