By Frank Pingue
TORONTO (Reuters) - The Canadian dollar was little changed against the U.S. dollar on Wednesday as domestic inflation data that topped expectations did not alter widespread expectations for the Bank of Canada to leave its key interest rate steady.
Domestic bond prices were pinned lower across the curve, but the move was seen as spillover from a slide in the bigger U.S. Treasury market given talk of higher interest rates south of the border.
At 8:30 a.m., the Canadian unit was at C$1.0083 to the U.S. dollar, or 99.18 U.S. cents, up from C$1.0084 to the U.S. dollar, or 99.17 U.S. cents, at Tuesday's close.
The latest Canadian data showed the annual inflation rate rose past expectations to 3.1 percent in June from 2.2 percent in May, while core inflation stood at 1.5 percent.
Since the headline inflation number beat expectations for a rise of 2.9 percent, the Canadian dollar initially jumped to C$1.0065 to the U.S. dollar, or 99.35 U.S. cents, before moving back to its pre-data level about a minute later.
That's largely because the Bank of Canada said last week inflation would peak at 4.3 percent early next year, and so Tuesday's data lacked the punch to spark a sustained move in the dollar.
"The market's attention span is probably not quite that great at the moment," said Shaun Osborne, chief currency strategist at TD Securities. "Unfortunately it's the usual thing with foreign exchange where we get the data, we look at the headline and we move on to the next issue."
In its Monetary Policy Report update last week, the Bank of Canada said soaring oil prices would lift headline inflation as high as 4.3 percent in early 2009, while core inflation, which strips out volatile food and energy prices, should stay within the bank's 1 percent to 3 percent target range.
So the inflation data is not expected to alter the market expectations for the Bank of Canada to leave its key overnight rate steady at 3.00 percent until 2009.
But Osborne said if you dig through the inflation data it does suggest Canada may have a bit of an issue with inflation later in the year unless we get some very soft numbers running over the next few months.
Canadian bond prices were all down as the latest comments from Federal Reserve officials were considered hawkish by dealers and weighed on prices.
The Canadian inflation report had no noticeable impact on bond prices since the market was braced for a strong report given last week's comments from the Bank of Canada.
"There's not really a heck of a lot of surprise in the number set here and no reason to really believe that there is any kind of monetary response to come off of this," said Stewart Hall, market strategist at HSBC Canada.
"Nor would we expect to see the Canadian bond market chart its own pricing path, instead I think we are getting most of our pricing direction out of the U.S. market."
U.S. bond prices were down across the curve a day after Philadelphia Federal Reserve Bank President Charles Plosser said rising inflation could force the Fed to start raising interest rates sooner rather than later.
The two-year bond was down 7 Canadian cents at C$100.88 to yield 3.254 percent. The 10-year bond fell 32 Canadian cents to C$102.95 to yield 3.886 percent.
The yield spread between the two-year and 10-year bond was 63.2 basis points, up from 63.7 basis points.
The 30-year bond fell 35 Canadian cents to C$113.50 for a yield of 4.189 percent. In the United States, the 30-year treasury yielded 4.684 percent.
The three-month when-issued T-bill yielded 2.47 percent, up from 2.45 percent from the previous close.