By Lynne Olver
TORONTO, Oct 19 (Reuters) - The Canadian dollar made gains
against the U.S. dollar on Friday after a higher than expected
headline inflation reading was seen reducing the chances of a
interest rate cut by the Bank of Canada.
Domestic bond prices reversed course to end higher across
the yield curve, in tandem with the U.S. Treasury market, as
stock markets fell.
The Canadian dollar closed at 96.57 Canadian cents to the
U.S. dollar, or US$1.0355, up from Thursday's close of 97.37
Canadian cents to the U.S. dollar, or US$1.0270.
The currency shot to US$1.0357 following the release of
consumer price inflation data, and hung on to those gains for
most of the session, coming close to a 33-year high against its
U.S. counterpart but not quite reaching it.
Oil prices touched more than $90 a barrel on Friday before
retreating, but credit for the Canadian unit's move was given
to the CPI data and shifting expectations about a rate cut.
Statistics Canada said that pricier gasoline over the past
year pushed the overall inflation rate in September to 2.5
percent from 1.7 percent in August. The core inflation rate,
which excludes some food and energy costs, came in at 2.0
percent, down from 2.2 percent in August, and in the middle of
the Bank of Canada's target inflation range.
"If you look at the timing of 85 percent of the move in
(U.S.) dollar-Canada, it occurred in a very short span of time,
which would tend to suggest it's not trading off commodities,
it's trading off the CPI report," said Stewart Hall, market
strategist with HSBC Canada.
The Bank of Canada, in its Monetary Policy Report and in
statements this week, did not give the sense they were overly
concerned about inflation, Hall noted.
"Maybe the fact that the headline number went from 1.7
percent to 2.5 percent is what's got the market bubbling."
But details underlying the report aren't nearly as striking
as the all-items CPI figure would suggest, analysts said, so
there could be some unwinding of Friday's currency move next
week, Hall said.
Some commentators still expect the central bank to reduce
rates in the coming months.
"We stick to our view that the BoC will cut the policy rate
by 50 basis points by the end of 1Q 2008," JP Morgan Canada
economist Ted Carmichael said in a note. He expects that core
inflation will fall below 2 percent by the first quarter of
2008, sooner than the central bank projects, because the strong
Canadian dollar will lower import prices and economic growth
Canadian bond prices initially fell at the short end after
the CPI release, but as stocks fell, a flight-to-quality move
lifted North American government bonds.
"We're getting pricing direction out of the U.S., but we're
lagging the move," Hall said of Canadian bonds. That's because
the U.S. economy shows more difficulties than Canada's, where
the economy continues to run above capacity.
The two-year bond rose 18 Canadian cents to C$100.21 to
yield 4.143 percent, while the 10-year bond gained 58 Canadian
cents to C$97.63 to yield 4.302 percent.
The yield spread between the two-year and 10-year bond
moved to 15.9 basis points from 14.9 at the previous close.
The 30-year bond gained 90 Canadian cents to C$110.49 to
yield 4.365 percent. In the United States, the 30-year treasury
yielded 4.681 percent.
The three-month when-issued T-bill yielded 3.97 percent
unchanged from the previous close.