Canadian dollar jumps
Canadian dollar jumps after inflation data
Now trading near its 29-year high
Reuters
Published: Thursday, May 17, 2007
TORONTO -- The Canadian dollar raced ahead versus the U.S. dollar on Thursday as the domestic core rate of inflation jumped to a four-year high and upped the likelihood for a Bank of Canada rate hike this year.
Domestic bond prices turned lower immediately after the data as core inflation for the second quarter could now come in above the Bank of Canada's estimate.
At 8:15 a.m. ET, the Canadian unit was at C$1.0995 to the U.S. dollar, or 90.95 U.S. cents, up from C$1.1039 to the U.S. dollar, or 90.59 U.S. cents, at Wednesday's close.
The jump in the Canadian dollar, now within sight of the 29-year high of C$1.0931, or 91.48 U.S. cents, hit last May, came immediately after data showed the core inflation rate at 2.5% in April.
That was higher than expectations for a core reading of 2.4% and could lead to core inflation for the second quarter coming in above the Bank of Canada's estimate of 2.2%.
"Certainly this is not going to make officials at the Bank (of Canada) happy and it does significantly increase the risk that the they're going to see rate hikes on the horizon," said Marc Levesque, chief strategist at TD Securities. "This is obviously bullish for the Canadian dollar."
In its Monetary Policy Report last month, the central bank predicted that core inflation in the second quarter of 2007 would be 2.2% and would slip to 2.1% in the second half of the year.
The Bank of Canada, which has left its key overnight rate steady at 4.25% since May 2006, is next due to set rates on May 29.
The Canadian dollar is now up about 6.6 percent in the past two months and the rise has been credited to a combination of strong domestic data, higher commodity prices, a weaker U.S. dollar, and merger-related interest in Canada companies.
While the inflation data was the key report due in Canada all week, the market will still keep an eye on the March retail sales report due on Friday.
BONDS TUMBLE AFTER DATA
Canadian bond prices were knocked lower from flat levels as the inflation data convinced many in the market that the Bank of Canada will eventually have to hike interest rates to stave off inflation.
The data shines more spotlight on the diverging perception of how the Canadian and U.S. economies are performing and how the central banks of each country will act.
"This further reinforces our view that you are going to see some convergence in policy rates before the end of the year, or that's what the risk is anyway between Canada and the United States," said Levesque.
The two-year bond was down 9 Canadian cents at C$98.96 to yield 4.283%, while the 10-year bond fell 23 Canadian cents to C$97.97 to yield 4.274%.
The yield spread between the two-year and 10-year bond moved to -1.4 basis points from 0.4 at the previous close.
The 30-year bond dropped 65 Canadian cents to C$123.00 to yield 4.277%. In the United States, the 30-year treasury yielded 4.884%.
The three-month when-issued T-bill yielded 4.19%, up from 4.17% at the previous close.
© Reuters 2007
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