Markets News

CANADA FX DEBT-Loonie rallies as higher inflation weighs on rate cut bets

    * Canadian dollar rises 0.2% against the greenback
    * Canada's annual inflation rate rises to 2.2%
    * Price of U.S. oil declines 0.4%
    * Canadian bond prices fall across a steeper yield curve

    By Fergal Smith
    TORONTO, Dec 18 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, adding to this week's
gains after bets that the Bank of Canada would cut interest
rates over the coming months were tempered by data showing a
pick-up in underlying inflation.
    Canada's annual inflation rate rose 2.2% as expected in
November on the back of higher energy prices, while the average
of the Bank of Canada's three measures of core inflation rose to
2.2% from 2.1%, data from Statistics Canada showed.             
    "It does make for a more challenging environment to follow
some of the other central banks in easing," said Robert Both, a
macro strategist at TD Securities.
    The Bank of Canada has left its policy rate unchanged at
1.75% this year despite easing by the Federal Reserve and the
European Central Bank. Chances of an interest rate cut by July
next year fell to 13% from 20% before the data, the overnight
index swaps market indicated.           
    At 9:04 a.m. (1404 GMT), the Canadian dollar          was
trading 0.2% higher at 1.3127 to the greenback, or 76.18 U.S.
cents. The currency, which notched on Monday a near seven-week
high at 1.3115, traded in a range of 1.3128 to 1.3174.
    For the week, the loonie was up 0.3%, helped by a trade deal
between the United States and China.
    Canada is a major exporter of commodities, including oil, so
its economy could benefit from an improved outlook for global
    U.S. crude oil futures        were down 0.4% at $60.68 a
barrel after U.S. industry data showed a surprise buildup in
crude inventories but losses were kept in check by expectations
for an uptick in demand next year on the back of progress in
resolving the U.S.-China trade row.             
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 2 Canadian cents
to yield 1.715% and the 10-year             falling 24 Canadian
cents to yield 1.661%.
    The gap between Canada's 10-year yield and its U.S.
equivalent narrowed by 3 basis points to a spread of 22.5 basis
points in favor of the U.S. bond.

 (Reporting by Fergal Smith; Editing by Steve Orlofsky)