C$ weakens as cooler inflation slams rate hike talk

By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar weakened on Friday to close its worse week since early March versus its U.S. counterpart, pressured by cooler-than-expected domestic inflation and a slide in prices for oil, one of the country's main exports.The loonie, as the Canadian currency is colloquially known, fell 1.3 percent over the course of a week in which U.S. crude notched its biggest drop in a month and Ontario introduced a string of measures to cool Toronto's red-hot housing market.

The Canadian dollar settled at C$1.3503 to the greenback, or 73.91 U.S. cents, weaker than Thursday's close of C$1.3472, or 74.31 U.S. cents and its first close above C$1.35 since March 9.

The losses on Friday came in the immediate aftermath of the morning release of inflation data for March that showed price growth pulling away from the central bank's target.

The annual rate fell to 1.6 percent from the previous month's 2.0 percent, exceeding economists' forecasts for a decline to 1.8 percent.

"It's a barometer of how much slack there is in the economy, how little pricing power there is across the economy," said Eric Theoret, currency strategist at Scotiabank. "We just don't have any pressure on inflation because our economy is operating so far below potential."

Earlier this month, the central bank dropped its dovish bias and said it was "decidedly neutral" even as it raised its growth forecast for 2017.

"I just don't see the talk of rate hikes any time soon as being credible," said Derek Holt, head of capital markets economics at Scotiabank.

The currency remained under pressure through the session as U.S. crude slumped below $50 a barrel on renewed concerns that rising U.S production was cancelling out OPEC's efforts to reduce a global glut. [O/R]

Scotiabank's Theoret said that new housing measures introduced this week by Ontario, which include a 15 percent tax on property purchases by foreign buyers, added to the negative momentum.

"Given the Canadian economy's dependence on housing, there is a risk to the outlook as a result of the measures introduced this week," he said.

Canadian government bond prices were higher across the yield curve, with the two-year price up 4 Canadian cents to yield 0.714 percent and the benchmark 10-year rising 14 Canadian cents to yield 1.467 percent.

(Additional reporting by Fergal Smith; Editing by Bernadette Baum and Diane Craft)