By Fergal Smith
TORONTO, Jan 17 (Reuters) – The Canadian dollar strengthened against its U.S. counterpart on Tuesday as investors raised bets on a Bank of Canada interest rate hike this month following domestic data showing persistence in underlying inflation pressures.
Canada’s annual inflation rate eased more than expected to 6.3% in December as gas prices came down, but core measures remained little changed from the previous month.
Underlying measures of inflation “are a little bit stickier” than the headline, said Michael Greenberg, SVP and portfolio manager at Franklin Templeton Investment Solutions.
The Bank of Canada is going to keep its “eye on the prize,” which is inflation moving back to a range of 1% to 3% with inflation expectations anchored, Greenberg added.
Canada’s central bank has raised its benchmark interest rate at a record pace of 400 basis points in nine months to 4.25%.
Money markets see a 75% chance of a further quarter-point in tightening at a rate decision next week, up from 70% before the data, and expect the rate to peak at about 4.50%. 0#BOCWATCH
The Canadian dollar CAD= was trading 0.2% higher at 1.3375 to the greenback, or 74.77 U.S. cents, after moving in a range of 1.3370 to 1.3437.
Adding to support for the loonie, U.S. crude futuresCLc1 settled 0.4% higher at $80.18 a barrel on hopes that a recent shift in China’s COVID-19 policy will boost fuel demand. Oil is one of Canada’s major exports.
Separate economic data showed Canadian housing starts falling 5% in December to a seasonally adjusted annualized rate of 248,625 units.
Canadian government bond yields were mixed across the curve, with the 2-year CA2YT=RR easing 2.3 basis points to 3.572%.
It was trading 62.6 basis points below the equivalent rate on U.S. Treasuries, with the gap narrowing by 2 basis points and at the smallest since Nov. 2.
(Reporting by Fergal Smith; Editing by Angus MacSwan and Andrea Ricci)
((fergal.smith@thomsonreuters.com; +1 647 480 7446;))
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