07/16/2012 08:56 EDT | Updated 09/15/2012 05:12 EDT

Loonie little changed, traders look to central bank intentions on interest rates

TORONTO - The Canadian dollar closed flat Monday, a day before the Bank of Canada makes its next scheduled announcement on interest rates.

The commodity-sensitive currency was off 0.01 of a cent to 98.55 cents US as prices for oil and metals stepped back on economic worries.

Worries about slowing economic conditions picked up as U.S. retail sales data for June came in much worse than expected. Sales slid 0.5 per cent versus the 0.2 per cent gain that had been forecast. The decline followed a 0.2 per cent dip in May.

Economists expect the Bank of Canada will leave its key rate unchanged at one per cent. Analysts will be looking at the tone of the bank's accompanying statement for indications of when the bank might start to raise rates.

There had been speculation earlier this year that the central bank would move to hike rates.

But Scotia Capital chief currency strategist Camilla Sutton observed that developments since the bank's last rate announcement June 5, include "tighter mortgage and housing rules in Canada, a two per cent rally in the currency, an escalation in the European crisis and a dovish tone from most central banks."

"In this environment, we would expect the hawkish BoC tone to soften, which risks weighing temporarily on (the dollar)."

Meanwhile, the yield on the government's key 10-year bond hit a record low of 1.598 per cent during Monday's session as Statistics Canada announced that foreigners bought up record amounts of Canadian securities in May.

"You can tuck this all under the tidy heading of safe haven flows," said Craig Fehr, Canadian markets strategist at Edward Jones in St. Louis.

"With the 10-year at (these levels), it’s just clearly a reflection of global angst and nervousness. It does benefit the Canadian economy, the Canadian government gets to borrow at cheaper rates."

Statistics Canada says they snapped up a record $26.1 billion of securities, mainly in the form of government debt. Those securities were attractive as Canadian long-term interest rates exceeded their U.S. counterparts in May by the largest spread since September 2011.

The Canadian yield late in the afternoon was 1.62 while the yield on the 10-year U.S. treasury was 1.462 per cent.

Commodity prices eased after sharp runups in oil and copper at the end of last week after weak Chinese growth data raised hopes that officials will move to take further steps to stimulate their economy, which is the second-biggest in the world.

Those hopes were elevated Monday as the International Monetary Fund cut its growth forecast for China’s slowing economy Monday and said a "hard landing" was still possible.

The IMF reduced its Chinese growth outlook for 2012 by 0.2 percentage points to eight per cent and for 2013 by 0.3 points to 8.5 per cent. Data released Friday showed that China’s second-quarter growth fell to a three-year low of 7.6 per cent as exports, consumer spending and factory output weakened.

Hopes for further Chinese government stimulus helped push the August crude contract on the New York Mercantile Exchange up $1.33 to US$88.43 a barrel.

Copper prices slipped two cents to US$3.48 a pound while bullion faded 40 cents to US$1,591.60 an ounce.

Europe’s debt crisis will also remain near the top of investors’ concerns.

Germany’s highest court says it won’t decide until September whether to issue a temporary injunction that would delay the country’s ratification of Europe’s new permanent bailout fund and budget discipline pact.

Parliament endorsed both the permanent bailout fund, called the European Stability Mechanism, and the fiscal compact on June 29. But President Joachim Gauck has held off signing them into law after complaints were filed with the court.

Also, investors will be awaiting details of Spain’s bank bailout. Later this week, eurozone countries are expected to give Spain €30 billion as part of a larger bailout for its banks.

Worries over Spain and the other indebted euro countries, have weighed on Europe’s single currency over the past few weeks.