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The Canadian dollar steadied against the greenback on Friday, but held near a five-week low hit after domestic data showing a slowdown in inflation was supportive of the Bank of Canada maintaining a gradual approach to interest rate hikes.

The annual inflation rate in September dipped to 2.2 per cent from 2.8 per cent as price pressures from gas and air travel eased. Analysts had forecast an annual rate of 2.7 per cent.

The central bank’s three core inflation measures all fell, for the first time since November, 2016.

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“This should really quell a lot of speculation that the Bank of Canada will move away from the gradual path of tightening,” said Andrew Kelvin, senior rates strategist at TD Securities.

The central bank said in September that it had discussed dropping its gradual approach to raising rates. A faster pace of tightening could boost the loonie.

Money markets still expect the Bank of Canada to lift its policy rate by 25 basis points next week to 1.75 percent, but the amount of tightening seen by March slipped to 51 basis points from 55 basis points before the data.

Separate data showed that the value of Canadian retail trade unexpectedly fell by 0.1 per cent in August, the second decline in three months.

The loonie had been trading higher ahead of the data release as oil prices rebounded. After the data release, it slumped to its weakest since Sept. 11 at 1.3120 to the U.S. dollar before recovering somewhat.

The price of oil, one of Canada’s major exports, rose on signs of surging demand in China, the world’s second-biggest oil consumer. Still, the market was heading for a second week of losses on rising U.S. inventories and concern that trade wars were curbing economic activity.

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U.S. crude prices were up 0.9 per cent at US$69.26 a barrel.

Canadian government bond prices were higher across the yield curve, with the 10-year bond rising 31 Canadian cents to yield 2.462 per cent.

The gap between the 10-year yield and its U.S. equivalent widened by 6 basis points to a spread of 73 basis points in favour of the U.S. bond, the biggest gap since July 23.

The Canadian Press

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