Canadian dollar softens as oil prices cool, CPI, retail data in focus

By Solarina Ho

TORONTO (Reuters) - The Canadian dollar slipped against the U.S. dollar on Thursday, retreating from a near one-week high earlier in the day, as oil prices fell and the rally in global stocks paused.

The weakness came ahead of Friday's domestic inflation data for September and retail sales figures for August as well as the Bank of Canada's October rate decision next week.

Chances of an October hike have fallen to 15 percent from nearly 50 percent in mid-September, the overnight index swaps market indicated.

"I'd rather be a U.S. dollar seller because I think the (Federal Reserve) is pretty much fully priced at this point for December," said Shaun Osborne, chief currency strategist at Scotiabank.

"We still think the Bank of Canada goes in December again, and we're not anywhere fully priced for that, so there's probably more interest rate risk in the CAD's favor from that point of view."

An uncertain outlook for the North American Free Trade Agreement is a headwind for the loonie and growth in the economy is expected to slow after rapid expansion in the first half of the year.

At 4 p.m. (2000 GMT), the Canadian dollar was trading at C$1.2479 to the greenback, or 80.13 U.S. cents, down 0.1 percent.

The currency, which has been range-bound recently after rallying nearly 4 percent since early September, touched its strongest intraday level since Friday at C$1.2451.

"I think we'll probably continue to pivot around C$1.25," said Osborne, adding that Scotiabank remained constructive on the Canadian dollar in part because of its view on the Bank of Canada, but also because of its negative view on the U.S. dollar.

Prices of oil, one of Canada's major exports, fell on profit-taking and larger-than-expected product inventories in the United States. Benchmark crude prices have found support in recent weeks because of OPEC-led supply cuts, Middle East tensions and lower U.S. production.

U.S. crude prices settled down 1.4 percent at $51.29 a barrel.

World stocks retreated from all-time highs as traders marked 30 years to the day since the 1987 Black Monday stock market crash.

Canada's commodity linked-currency tends to benefit from risk appetite.

Canadian government bond prices were higher across the yield curve. The two-year rose 5 Canadian cents to yield 1.488 percent, while the 10-year rose 3 Canadian cents to yield 2.013 percent.

The 10-year yield touched its lowest since Sept. 8 at 1.977 percent.

(Reporting by Solarina Ho and Fergal Smith; Editing by Meredith Mazzilli and Peter Cooney)