Loonie dips on cool inflation

By Fergal Smith

TORONTO, April 21 (Reuters) – The Canadian dollar weakened on Friday against its U.S. counterpart as cooler-than-expected domestic inflation reduced pressure on the Bank of Canada to consider interest-rate hikes.

The annual rate fell to 1.6 percent from the previous month’s 2.0 percent, exceeding economists’ forecasts for a decline to 1.8 percent. The three measures of core inflation put in place by the Bank of Canada last year remained tame.

“I just don’t see the talk of rate hikes any time soon as being credible,” said Derek Holt, head of capital markets economics at Scotiabank.

The implied probability of a Bank of Canada rate hike by year-end dipped to 23 percent from 25 percent before the report, data from the overnight index swaps market showed.

Earlier this month, the central bank dropped its dovish bias and said it was “decidedly neutral” even as it raised its growth forecast for 2017.

At 9:05 a.m. ET, the Canadian dollar was trading at C$1.3492 to the greenback, or 74.12 U.S. cents, weaker than Thursday’s close of C$1.3472, or 74.31 U.S. cents.

The currency traded in a range of C$1.3459 to C$1.3498. On Thursday, the loonie touched its weakest in nearly six-weeks at C$1.3500, pressured by a drop this week in the price of oil on doubts that an Organization of the Petroleum Exporting Countries-led production cut will restore balance to an oversupplied market.

U.S. crude prices were down 0.06 percent at $50.68 a barrel on Friday.

Oil is one of Canada’s major exports. Many currency pairs traded in a tight range as investors prepared for the first round on Sunday of a tight French presidential election race.

Canadian government bond prices were higher across much of the yield curve, with the 10-year rising 16 Canadian cents to yield 1.465 percent. The 10-year yield fell 0.9 of a basis point further below its U.S. equivalent to a spread of -76.8 basis points.

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