C$ weakens as central bank policy direction sets tone

TORONTO: The Canadian dollar softened against its US counterpart on Thursday as weaker crude oil prices weighed and investor attention focused on the monetary policy directions of the US and Canadian central banks.

A slew of US data including inflation data and stronger-than-expected durable goods orders in January also helped strengthen the greenback against a basket of currencies , offsetting Canadian inflation figures that topped forecasts.

The US data, along with comments from Fed officials on Thursday, supported bets the US central bank will raise interest rates sometime in the middle of the year.

The Canadian dollar ended the North American session at C$1.2527 to the greenback, or 79.83 US cents, weaker than Wednesday's close of C$1.2423, or 80.50 US cents.

USForex currency strategist Lennon Sweeting said the last couple of sessions have been an opportunity for investors to take profit on long US dollar positions.

"Now what we're seeing is those same participants reloading those positions at lower levels with the overall theme being for US dollar strength over the next few months," said Sweeting.

"Inflation will be really the metric that's the question mark: how central banks are going to handle falling deflation as a result of these lower oil prices."

The price of crude , a major Canadian export, fell on the latest jump in US crude stockpiles, which hit a seasonal record high for the seventh week.

In Canada, the annualized rate of inflation dropped to 1 percent last month from 1.5 percent in December, but was still higher than the expected decline to 0.7 percent. The results supported the growing view that the Bank of Canada will not cut interest rates again next week as had been previously widely expected.

Markets have struggled to interpret the Bank of Canada, and before Governor Stephen Poloz's comments they had priced in a 70 percent or more chance of another rate cut next week. That has since dropped to less than 25 percent.

Canadian government bond prices were lower across the maturity curve, with the two-year down 7 Canadian cents to yield 0.507 percent and the benchmark 10-year down 27 Canadian cents to yield 1.354 percent.