June 19, 2019 / 8:39 PM / 3 months ago

CANADA FX DEBT-C$ posts one-week high as rising inflation fends off rate cuts

 (Adds economist quotes and details throughout; updates prices)
    * Canadian dollar gains 0.7% against the greenback
    * Canada inflation rate rises in May to a 7-month high of
2.4%
    * Loonie touches its strongest since June 12 at 1.3282
    * Canada-U.S. 2-year spread at narrowest since February 2018

    By Fergal Smith
    TORONTO, June 19 (Reuters) - The Canadian dollar
strengthened to a one-week high against its U.S. counterpart on
Wednesday, as domestic data showed the highest inflation rate
since last October and as the greenback broadly fell after a
Federal Reserve interest rate decision.
    Canada's annual inflation rate climbed to a seven-month high
of 2.4% in May, Statistics Canada data indicated. Compared to
April, prices were up 0.4%, led by big increase in the
recreation, education and reading category.             
    The breadth of the increase was "very narrow" but the Bank
of Canada will say there is no immediate need to cut interest
rates, said Derek Holt, vice president of capital markets
economics at Scotiabank.
    "The question is, if trade policy risks continue to escalate
or don't improve and if the Fed is dragging its policy rate down
... then there are limits to the extent that the bank can sit on
its hands."
    Money markets see about a 50% chance of a Bank of Canada
interest rate cut this year.           
    The U.S. dollar        weakened against a basket of major
currencies after the Federal Reserve announced it held interest
rates steady in June, but signaled a possible rate cut by the
end of the year.             
    At 4:07 p.m. (2007 GMT), the Canadian dollar          was
trading 0.7% higher at 1.3281 to the greenback, or 75.30 U.S.
cents.
    The currency, which was boosted on Tuesday by the revival of
trade talks between the United States and China, touched its
strongest level since June 12 at 1.3282.
    The price of oil, one of Canada's major exports, fell
despite a larger-than-expected decline in U.S. crude
inventories. U.S. crude oil futures        settled 0.3% lower at
$53.76 a barrel.
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 1 Canadian cent
to yield 1.408% and the 10-year             falling 11 Canadian
cents to yield 1.435%.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 11.4 basis points to a spread of 34.6
basis points in favor of the U.S. bond, its smallest gap since
February 2018.
    Separate Canadian data showed that home prices climbed for
the first time in nine months in May as the housing market
benefited from lower borrowing costs and from an economy that
was adding jobs.             

 (Additional reporting by Tyler Choi
Editing by Phil Berlowitz)
  
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