The Canadian dollar CADUSD strengthened against its U.S. counterpart on Wednesday as investors weighed the start of the Federal Reserve’s interest rate hiking cycle and domestic data showed inflation climbing further in February.
Canada’s annual inflation rate accelerated in February to hit a fresh 30-year high of 5.7%, with broad price gains hitting consumers on all fronts, bolstering the case for the Bank of Canada to move forcefully on rates.
“The BoC needs to show it is serious about inflation risk and adhering to its mandate with a larger move than just 25bps in April,” Derek Holt, vice president of capital markets economics at Scotiabank, said in a note.
The Bank of Canada hiked interest rates for the first time in more than three years earlier this month, moving by 25 basis points, and said it was prepared to act aggressively if needed to keep inflation expectations grounded.
Money markets expect further tightening at the next policy announcement on April 13 and see a 60% chance that the move is by a less conventional 50 basis points increment.
The Canadian dollar was trading 0.5% higher at 1.2715 to the greenback, or 78.65 U.S. cents, after touching its strongest intraday level since March 7 at 1.2689.
World stocks rallied and the safe-haven U.S. dollar fell as investors grew more hopeful for a breakthrough in ceasefire talks between Russian and Ukraine and the Fed hiked interest rates by 25 basis points as expected.
The price of oil, one of Canada’s major exports, settled 1.5% lower at $95.04 a barrel.
Canadian government bond yields climbed, led by the front of the curve and tracking the move in U.S. Treasuries. The 2-year touched its highest level since January 2019 at 1.933% before dipping to 1.911%, up 11.2 basis points on the day.
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