CANADA FX DEBT-C$ firms, helped by rise in producer prices

Reuters

* Canadian dollar at C$1.1059 or 90.42 U.S. cents * Bond prices lower across the maturity curve By Leah Schnurr TORONTO, Feb 3 (Reuters) - The Canadian dollar strengthened against the greenback on Monday to its highest level in a week, helped by a bigger than expected rise in producer prices and as investors consolidated after recent declines.

The recent weakness in the Canadian dollar helped producer prices rise by 0.7 percent in December, data showed, with higher energy prices also contributing to the gain. Economists had forecast an increase of 0.3 percent. Raw materials prices also rose.

"Those are both leading indicators of what we can expect with inflation down the road, so with those being on the hotter side of things, it's a welcome development when we've had any sort of inflation in terms of consumer prices be on the soggy side of expectations lately," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

The Bank of Canada said late last month that it has become more concerned about weak inflation. Expectations that the central bank will likely keep policy to the dovish side, has sparked a sell-off in the loonie in recent months.

In monetary policy parlance, a dovish central bank would not be keen to raise interest rates. Higher interest rates customarily strengthen free-floating currencies, such as the Canadian dollar, because deposits would yield higher returns.

"While producer prices and raw materials aren't really top tier economic data and the Bank of Canada probably doesn't put a big weight on them, it does bode well in terms of the overall outlook for inflation moving forward and how the Bank of Canada will react to that," said Smith.

The data was the first release in a busy economic calendar this week, which will culminate in the closely watched unemployment report on Friday. Hiring is expected to pick up in January after the economy unexpectedly shed jobs the month before.

The Canadian dollar was at C$1.1059 to the greenback, or 90.42 U.S. cents, stronger than Friday's close of C$1.1138, or 89.78 U.S. cents.

The currency had notched fresh 4-1/2-year lows in each of the past four sessions. In the first month of the year, the U.S. dollar appreciated by nearly 5 percent against the loonie.

The Canadian dollar briefly broke through the psychologically important C$1.12 area on Friday before bouncing back higher. That the currency was not able to sustain the move past C$1.12 helped the loonie gain some strength on Monday, said Smith.

"The trade has been a little crowded for a while, we needed a little washout and reset," said Smith. "So it's along the lines that we expect a little bit of a consolidation here until we see the catalyst for the next move higher" for the U.S. dollar-Canadian dollar pairing.

The Canadian dollar saw limited reaction to data overseas that pointed to a weak start to the year for China's economy as business conditions for manufacturers worsened in January. Still, euro zone factories saw their best month since mid-2011.

Canadian government bond prices were lower across the maturity curve, with the two-year off 3 Canadian cents to yield 0.965 percent and the benchmark 10-year down 27 Canadian cents to yield 2.374 percent.

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