TORONTO -- The Canadian dollar fell against the U.S. currency on Wednesday after unexpectedly low domestic inflation data took pressure off the Bank of Canada to raise rates.
The currency hit a two-week low against its U.S. counterpart, touching US95.70 cents or US96.26 cents just before the data.
Core CPI, closely watched by the central bank, came in slightly weaker than expected with a decline of 0.3% in the month for an annual rate of 1.5%,, below the market forecast of 1.7%.
"The weakness in the data takes any kind of pressure off of the Bank of Canada to potentially act sooner rather than later so I think from a shorter term perspective we might see a little more Canadian dollar weakness in reaction to that," said George Davis, chief technical strategist at RBC Capital Markets.
In addition to the inflation report, the main factors driving the Canadian currency lower on Wednesday came from broader greenback strength.
Earlier, the greenback rallied broadly as investors reckoned the Massachusetts election of a Republican to the U.S. Senate was dollar positive as it might see the government rein in spending and reduce the fiscal deficit.
"We did see the euro/dollar break below it's 200-day moving average overnight and there was a lot of stop-loss selling of euros," said Davis. "We also saw some selling of the Canadian dollar on the crosses, most notably against the yen."
Canadian bond prices were higher across the curve, following U.S treasuries higher in Europe as investors snapped up bargains after losses the previous day when rallying stocks hurt demand for government debt and on expectations of a lower open on Wall Street.
Canadian bond yields edged even lower after the inflation data. The yield on the 2-year bond dipped to 1.217% from 1.255% just before the announcement.
Yields on overnight index swaps, which trade based on expectations for the key rate, edged lower after the statement,showing the market saw tightening as slightly less likely. Still, the market suggests the rate will be around 0.50% in July and 1% in December.
