The Canadian dollar CADUSD strengthened to its highest level in more than two weeks against its U.S. counterpart on Thursday and bond yields climbed, as investors bet on aggressive interest rate hikes this year by the Bank of Canada to tackle inflation.
Canada’s headline inflation may have peaked after hitting a 31-year high of 6.7 per cent in March, economists said, though the Bank of Canada still faces an uphill battle to bring rocketing prices under control before expectations become entrenched.
Money markets expect about 200 basis points of additional tightening this year from the BoC after it hiked rates in March and last week, which would lift the policy rate to 3 per cent.
“A hawkish BoC will continue to support CAD gains over the coming months,” strategists at Scotiabank, including Shaun Osborne, said in a note.
“Near-term gains may extend to a test of 1.24, with further CAD appreciation perhaps proving more difficult as the Fed also sets on a steep hiking cycle.”
The Federal Reserve is expected to hike its benchmark overnight interest rate by half a percentage point at its May 3-4 policy meeting.
The Canadian dollar was trading 0.2 per cent higher at 1.2475 to the greenback, or 80.16 U.S. cents, after touching its strongest level since April 5 at 1.2459.
The gain for the loonie came as the price of oil, one of Canada’s major exports, moved higher amid concerns about supply as the European Union (EU) mulls a potential ban on Russian oil imports. U.S. crude prices were up 1.9 per cent at $104.17 a barrel.
Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year touched its highest level since July 2011 at 2.900 per cent, up as much as 8.3 basis points on the day.
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