GB: Canadian dollar falls as data spurs rate-cut expectations
The Canadian dollar fell on Friday, weakened by a combination of soft oil prices, concerns about the U.S. banking sector and weak Canadian inflation data that encouraged the view that the Bank of Canada would cut interest rates again.
The Canadian inflation rate softened more than expected in January, which persuaded most market experts that the central bank will soon take its key overnight rate below the current 50-year low of 1 percent.
"It suggests the Bank of Canada might be a little bit more willing to cut rates further than was previously thought," said Doug Porter, deputy chief economist at BMO Capital Markets. "And we've seen some of yesterday's pop in oil prices reverse, so I think by itself that would weigh on the Canadian dollar."
At 9:35 a.m. (1435 GMT), the Canadian currency was at C$1.2635 to the U.S. dollar, or 79.15 U.S. cents, down from Thursday's close of C$1.2593 to the U.S. dollar, or 79.41 U.S. cents.
It rose to C$1.2562, or 79.61 U.S. cents, moments after the data was released but then quickly turned lower
The inflation figures, Canada's key economic report for the week, showed a drop in vehicle prices pushed consumer prices down in January by a sharper than expected 0.3 percent for an annual inflation rate of 1.1 percent, compared with 1.2 percent in December.
The Bank of Canada will make its next rate announcement on March 3. It has already lowered its overnight rate by 350 basis points since December 2007.
The Canadian dollar has fallen in recent weeks in tandem with global equity markets, which continued to lose value on Friday as concerns grew about the outlook for the world economy.
Equities were expected to stay weak on Friday due to worries that the U.S. government's bank rescue plan might involve nationalization.
BONDS PRICES HIGHER
Canadian bond prices bounced back after weakness in recent sessions and were comfortably higher across the curve, helped by a combination of the inflation figures and a rally in the bigger U.S. Treasury market.
Deepening anxiety about the fragility of the U.S. banking sector weighed on investor sentiment in Canada and helped to lure investors back into more secure government debt.
The soft Canadian inflation data for January and a slide of more than 2 percent on Toronto's key stock index shortly after the open, also helped lend a boost to bond prices.
"We're following to some extent the hefty rally we are seeing in the U.S. Treasuries," Porter said. "But certainly the inflation data did no harm to the Canadian bond market either."
The interest-rate sensitive two-year bond was up 8 Canadian cents at C$102.68 to yield 1.212 percent, while the 10-year bond rose 70 Canadian cents to C$111.55 to yield 2.824 percent.
