Canada dollar down on inflation numbers

The Canadian dollar was down on Tuesday as slim gains after domestic inflation came in as expected were not enough to erase overnight losses.

Domestic bond prices remained higher as fears about the credit market lingered, while the inflation data made the idea of a Bank of Canada rate hike in September seem unlikely.

At 7:50 a.m. ET the Canadian unit was at $1.0600 to the U.S. dollar, or US94.34 cents, up from pre-data levels around $1.0613 to the U.S. dollar, or US94.22 cents. But it was below its Monday close of US$1.0541 to the U.S. dollar, or US94.87 cents.

The inflation figures helped comfort a market that had been mulling if a much weaker report might prompt talk of a Bank of Canada rate cut. Statistics Canada said Canada's annual inflation rate was 2.2% in July, while the core rate fell to 2.3%, exactly as expected by analysts.

"Not much to say really, all the data came out as expected across the board on a headline and core basis," said George Davis, chief technical strategist, at RBC Capital Markets. "So we haven't really seen much of a significant reaction in the currency."

Davis suggested it is "steady as she goes" for the Bank of Canada, which he expects will not hike rates next month.

But the modest boost to the Canadian dollar from the data was not enough to help it reverse losses overnight, when the currency fell to a low of $1.0637 to the U.S. dollar, or US94.01 cents.

Concerns about the credit crunch and oil prices that extended losses to below US$71 a barrel as Hurricane Dean was expected to spare the U.S. Gulf Coast are still weighing on the currency.

The market will now focus on Canadian retail sales data due at 8:30 a.m. Retail sales are expected to drop 0.5% in June after an unexpectedly strong a 2.8% gain in May.

BONDS KEEP HIGHER

Canadian bond prices remained higher after the domestic inflation report.

The central bank had been widely expected to lift its key rate to 4.75% next month, but the latest market turmoil has made that unlikely.

The two-year bond rose 5 cents to $99.46 to yield 4.065%, while the 10-year bond increased 23 cents to $97.27 to yield 4.345%.

The yield spread between the two-year and 10-year bond moved to 28.2 basis points from 27.0 at the previous close.

The 30-year bond rose 3 cents to $109.33 to yield 4.432%. In the United States, the 30-year treasury yielded 4.962%.

The three-month when-issued T-bill yielded 4.15%, down from 4.17% at the previous close.