C$ lower, but rise in inflation rate stems decline

TORONTO: The Canadian dollar weakened against the greenback on Friday, extending a three-day sell-off that has all but wiped out February's gains even as a stronger-than-expected increase in inflation helped the currency pare the worst of the day's declines.

The closely watched report showed the annual Canadian inflation rate unexpectedly jumped to 1.5 percent last month. Analysts said the report reduced the likelihood of an interest rate cut by the Bank of Canada, which has flagged its concerns about a weak inflation environment.

Overnight index swaps, which trade based on expectations for the central bank's policy rate, showed traders pared back their already small bets on a rate cut in 2014 after the inflation report was released.

"I think it does give the Bank of Canada a little more breathing room with respect to inflation," said David Tulk, chief Canada macro strategist.

Still, the report was not enough to completely reverse the Canadian dollar's weaker direction, as investors also took in separate data that showed retail sales slumped in December.

"The inflation numbers were positive for a long-term strengthening Canadian dollar story. However, you still need the economy to perform well and we're going to need to see that in the data in the next couple of months before the loonie starts to gain some momentum," said Rahim Madhavji, president at KnightsbridgeFX.com in Toronto.

The Canadian dollar ended the North American session at C$1.1133 to the greenback, or 89.82 US cents, weaker than Thursday's close of C$1.1099, or 90.10 US cents. The currency earlier touched a session low of C$1.1196, putting it within reach of a 4-1/2-year low.

The Canadian dollar had clawed back some gains in the first three weeks of February, bouncing back from a 4-1/2-year low hit at the end of January. But that run higher was interrupted this week after a disappointing wholesale trade report and the currency is now up just 0.01 percent against its US counterpart for the month.

The loonie is likely to see range-bound trade between C$1.10 and C$1.13, said Madhavji.

Canadian government bond prices were mostly higher across the maturity curve, though the two-year was off 1 Canadian cent to yield 1.009 percent, while the benchmark 10-year was up 20.1 Canadian cents to yield 2.412 percent.