CANADA FX DEBT-C$ weakens as risk aversion offsets hot inflation data

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Canadian dollar weakens 0.2% against US dollar

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Canada’s annual inflation rate rises to 3.3%

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Price of U.S. oil settles 1.8% lower

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10-year yield touches its highest in nearly 15 years

By Fergal Smith

TORONTO, Aug 15 (Reuters) – The Canadian dollar weakened to a one-week low against its U.S. counterpart on Tuesday as investors grew more risk averse and despite hotter-than-expected domestic inflation data that supported bets for another Bank of Canada rate hike.

The loonie was trading 0.2% lower at 1.3487 to the U.S. dollar, or 74.15 U.S. cents, after touching its weakest intraday level since last Tuesday at 1.35.

“There is a degree of correlation between the CAD and risk assets,” said Bipan Rai, global head of FX strategy at CIBC Capital Markets. “It’s more important to ask what’s driving that and there’s a confluence of factors.”

Wall Street’s main indexes fell after stronger-than-expected U.S. retail sales data stoked worries interest rates could stay higher for longer, while the price of oil, one of Canada’s major exports, was pressured by sluggish Chinese economic data. U.S. crude oil futures settled 1.8% lower at $80.99 a barrel.

Canada’s annual inflation rate rose more than expected to 3.3% in July, increasing the likelihood of another interest rate increase. Money markets see a 29% chance of a rate hike at the next policy decision on Sept. 6, up from 22% before the data.

“There is a certain degree of sticker shock with the (inflation) print overall but if you peel back the layers, you look at the core gauges, there is some evidence there that tighter (monetary) policy is starting to pass through, impacting demand at the margin.”

Separate domestic data showed factory sales falling 1.7% in June from May and home sales down 0.7% in July from June.

Canadian bond yields were higher across the curve. The 10-year touched its highest level since November 2008 at 3.803% before dipping to 3.749%, up 6 basis points on the day. (Reporting by Fergal Smith; editing by Barbara Lewis)