TORONTO: The Canadian dollar dipped to a session low against its US counterpart on Friday after weaker-than-expected domestic inflation data looked unlikely to spur the Bank of Canada to act any time soon on its warning that it could raise interest rates.
The Canadian dollar fell to C$1.0126 versus the greenback, or 98.76 US cents, down from around C$C$1.0108, or 98.93 US cents heading into the report.
The data showed Canada's annual inflation climbed 1.5 percent in June from a two-year low in May, but still well below the Bank of Canada's 2 percent target.
"Obviously the market is seeing this as slightly increasing the chances of the (central) bank perhaps easing at some point, or maybe further pushing out the date when the bank will consider raising interest rates," said Doug Porter, deputy chief economist at BMO Capital Markets.
Earlier this week, the Bank of Canada held its benchmark interest rate at 1 percent but made clear it was still weighing an eventual move higher, sending a clear signal to markets that they should not be pricing in a rate cut.
However, overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders slightly increased bets on a rate cut in late 2012 after the inflation data.
At 9:47 a.m. (1347 GMT), the Canadian dollar stood at C$1.0121 against the US dollar or 98.80 US cents, down from Thursday's North American session close at C$1.0078, or 99.23 US cents.
The domestic currency was already on softer ground heading into the report, tracking global risk-averse sentiment as Spain's borrowing costs climbed back above their 7 percent pain threshold after one of its heavily indebted regions called for aid.
Against the euro, the Canadian dollar hit a record peak at C$1.2303, or 81.28 euro cents, following a recent string of highs.
Canadian bond prices climbed following the disappointing inflation figures, outperforming US Treasuries on the short end of the curve.
"There's been a bit of a rally across the curve for Canadian bonds. I think that's maybe just coming off the surprise of the weakness in the core measure but I wouldn't expect that to remain," said Mazen Issa, Canada macro strategist at TD Securities.
"We would expect some of that rally to unwind a little but just given that the global backdrop really becomes now the primary driver in terms of market sentiment and in this case fixed income rates."
The two-year government yield which is especially sensitive to Bank of Canada interest rate moves, fell to 0.955 percent from 0.967 percent just before the release.
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