The Canadian dollar CADUSD 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 that underlying inflation pressures persist.
Canada’s annual inflation rate eased more than expected to 6.3 per cent in December as gas prices came down but core measures remained little changed from the previous month, Statistics Canada said.
Money markets see a 77 per cent chance of a quarter-point hike by the Bank of Canada on Jan. 25, up from 70 per cent before the data.
The core measures of inflation “are a little bit stickier” than the headline, said Michael Greenberg, SVP and portfolio manager at Franklin Templeton Investment Solutions.
The BoC is going to keep its “eye on the prize,” which is inflation moving back to a range of 1 per cent to 3 per cent with inflation expectations anchored, Greenberg added.
The Canadian dollar was trading 0.2 per cent higher at 1.3380 to the greenback, or 74.74 U.S. cents, after moving in a range of 1.3372 to 1.3437.
Gains for the loonie came as the U.S. dollar lost ground against a basket of major currencies and the price of oil, one of Canada’s major exports, rose to a two-week high.
U.S. crude prices were up 1.2 per cent at $80.80 a barrel after China posted weak but expectation-beating annual economic growth data.
Separate domestic data showed housing starts falling more than expected in December to a seasonally adjusted annualized rate of 248,625 units, after posting a revised rate of 263,022 units in November.
Canadian government bond yields were mixed across the curve.
The 2-year eased 1.3 basis points to 3.582 per cent but the gap compared to the equivalent U.S. rate narrowed by 2.3 basis points to 62.3 basis points in favor of the U.S. bond, its smallest since Nov. 2.