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Canadian dollar weakens, pressured by Nafta risk and cooler inflation

Toronto

THE Canadian dollar weakened against the greenback on Friday as an uncertain outlook for the North American Free Trade Agreement (Nafta) trade pact and weaker-than-expected domestic inflation data clipped expectations for a Bank of Canada interest rate hike as early as this month.

Mexico's Economy Minister Ildefonso Guajardo said that US Trade Representative Robert Lighthizer was right that many issues must still be resolved in current trade negotiations to revamp Nafta, but added that they were not technically complicated.

"Nafta still remains a wildcard," said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets. "The Bank of Canada can't afford to step in front of that decision unless there is compelling data to do so."

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Canada's annual inflation rate cooled modestly to 2.2 per cent in April, short of economist expectations for 2.3 per cent, data from Statistics Canada showed.

Still, two out of three of the central bank's core inflation measures rose and separate data showed that Canadian retail sales rose by the most in five months.

It fits with the Bank of Canada's view that it is going to have to raise interest rates further but "inflation isn't really pushing them to do it in a really fast way that would destabilise the household sector", said Nathan Janzen, senior economist at Royal Bank of Canada.

The central bank has raised its benchmark interest rate three times since July to leave it at 1.25 per cent. Chances of another hike at the May 30 announcement sank to 33 per cent from nearly 50 per cent before the data.

At 4 pm EDT, the Canadian dollar was trading 0.5 per cent lower at C$1.2879 to the greenback, or 77.65 US cents. The currency touched its weakest since Tuesday at C$1.2911. For the week, the loonie fell 0.7 per cent.

Declines for the loonie came as the US dollar rose to a five-month peak against a basket of currencies and the price of oil fell. REUTERS