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Canadian dollar retreats from four week high as market distrusts inflation uptick

By Fergal Smith
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar was little changed against its U.S. counterpart on Wednesday, pulling back from an earlier four-week high as investors doubted that a pick-up in domestic underlying inflation would be sustained.

Canada's annual inflation rate edged up to 1.9% in March from 1.5% in February, while two out of three of the Bank of Canada's measures of core inflation edged up into the 2.0% range, Statistics Canada data indicated.

The loonie notched its strongest intraday level since March 20 at 1.3275 after the data, but then gave back all its gains.

"The market is skeptical that there is a true uptick in core inflation," said Adam Button, chief currency analyst at ForexLive. "Looking forward, if the acceleration in core inflation continues the market will have to change course."

A shift in sentiment could see expectations unwind for an interest rate cut this year, Button said.

Chances of a policy easing by December fell to 20% from about 25% before the data, the overnight index swaps market indicated.

Separate data from Statistics Canada showed Canada's trade deficit declined for a second straight month in February, falling slightly to C$2.9 billion, after reaching a record high of C$4.8 billion in December 2018.

At 4:02 p.m. (2002 GMT), the Canadian dollar was trading nearly unchanged at 1.3346 to the greenback, or 74.93 U.S. cents.

The pullback for the loonie from an earlier four-week high came as the price of oil, one of Canada's major exports, turned lower.

U.S. crude oil futures settled down 0.5% at $63.76 a barrel as U.S. government data showed inventories drew down less than an industry report had suggested on Tuesday, offsetting upbeat economic reports from China.

A right-of-center party swept to power in Canada's main oil-producing province of Alberta on Tuesday and attacked Prime Minister Justin Trudeau's efforts to fight climate change, raising tension just months ahead of a federal election.

Canadian government bond prices were lower across the yield curve, with the two-year down 4.5 Canadian cents to yield 1.658% and the 10-year falling 14 Canadian cents to yield 1.799%.

The gap between Canada's two-year yield and its U.S. equivalent narrowed by 3.4 basis points to a spread of 74.6 basis points in favor of the U.S. bond.

(Reporting by Fergal Smith; Editing by Bill Trott and Grant McCool)