The Canadian dollar weakened on Friday, as Canada's inflation for August came in below expectations, prompting the market to rethink its expectations for future Bank of Canada interest rate hikes.
At 8:40 a.m., the domestic currency was at 1.3009 to the US dollar, or 76.87 US cents, down sharply from C$1.2904, or 77.50 US cents, at Thursday's close.
"It certainly highlights how sensitive (foreign exchange) markets are to small changes in the outlook for interest rates at the moment, which is clearly what's driving the Canadian dollar," said Adam Cole, senior currency strategist at RBC Capital Markets.
Canada's annualised rate of inflation slowed to 1.9 percent in August from 2.3 percent in July largely due to the easing cost of gasoline.
The figure missed expectations of a fall to 2.1 percent.
The Bank of Canada's measure of core inflation, which strips out volatile items like energy and some food, was 1.5 percent in August, short of expectations it would remain unchanged from July's 1.9 percent.
The Canadian dollar dropped immediately after the data was released, and continued to decline, pushing past the psychologically important C$1.30 level.
The Bank of Canada raised its overnight rate to 2.25 percent last week, and the market had been expecting another hike in October, with a good chance of an increase in December.
"The Bank of Canada's focus has been so closely on the output gap, and what that means for future inflation, that I think you've got to say that their immediate reaction to historical inflation is not that great, said Cole.
"So it would need further news to actually take a rate move off the agenda altogether."
Analysts noted that part of the decline was due to weak auto prices, which the central bank would be likely to dismiss as a temporary effect.
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