CANADA FX DEBT-C$ drops after wholesale trade data disappoints

Reuters

* Canadian dollar at C$1.1082 or 90.24 U.S. cents * Wholesale trade down 1.4 pct in December * Bond prices mostly lower across the maturity curve By Leah Schnurr TORONTO, Feb 19 (Reuters) - The Canadian dollar tumbled more than 1 percent against the greenback on Wednesday on track for its biggest daily percentage drop in over two years, hurt by data that showed domestic wholesale trade fell more than expected in December.

The drop interrupted the loonie's run higher in recent weeks that has seen it rebound from 4-1/2 year lows hit at the end of January. The currency was hit hard in the final months of 2013 and into the new year as a more dovish stance from the central bank pushed out expectations for when interest rates will rise.

The 1.4 percent drop in wholesale trade was the latest in a series of negative economic figures for December, though some economists have blamed bad winter weather for the disappointing data.

"It was a pretty poor number, all things considered," said Greg Moore, senior currency strategist at Royal Bank of Canada in Toronto.

"It does take the tracking lower for how the Canadian economy ended 2013. That's why we've seen a pretty massive move lower in reaction to that for the Canadian dollar." The Canadian dollar ended the North American session at C$1.1082 to the greenback, or 90.24 U.S. cents, weaker than Tuesday's close of C$1.0951, or 91.32 U.S. cents, according to the Bank of Canada.

The currency was down 1.2 percent against the U.S. dollar, putting it on track for its biggest one-day drop since December 2011, according to Thomson Reuters data.

After breaking through the C$1.10 level on Wednesday so easily, the Canadian dollar could see a resumption of January's selling if it surpasses C$1.1130, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

Nonetheless, Anderson thinks the loonie most likely will not break through that level until the market gets the next employment figures due at the beginning of March.

"A good number for the U.S. and we'll be right back above C$1.12," Anderson said.

Minutes from the U.S. Federal Reserve's most recent policy-setting meeting also pressured the loonie. The minutes showed several Fed policymakers wanted to drive home the idea that their economic stimulus program would be reduced in predictable steps unless the economy surprises them.

The removal of the Fed's bond-buying program is typically seen as a negative for the Canadian dollar, as it should benefit the U.S. dollar.

Even with the weak wholesale trade data, investors expect the biggest risk for the loonie this week will come from January inflation data due on Friday.

The Bank of Canada has noted its concern about the weak inflation environment and the numbers will be watched for any impact they might have on monetary policy.

"The Bank of Canada has been a very important driver of the Canadian dollar over the past six months, particularly given their gradual softening of their message and one that focuses more intently on the inflation numbers," Moore said.

"With that in mind, this Friday's CPI number will be a bit of a shaping moment for how forecasters consider the Bank of Canada meeting at the beginning of March." Canadian government bond prices were mostly lower across the maturity curve, with the two-year off 1 Canadian cent to yield 1.000 percent, though the benchmark 10-year was up 3 Canadian cents to yield 2.439 percent.

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