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The Canadian dollar CADUSD weakened against its U.S. counterpart on Wednesday as oil prices fell, but the currency pared its decline as domestic inflation data bolstered bets for a supersized interest rate hike by the Bank of Canada next month.

The loonie was trading 0.1 per cent lower at 1.2930 to the greenback, or 77.34 U.S. cents, after trading in a range of 1.2913 to 1.2996.

“Much of the CAD’s intraday trajectory can be attributed to movement in oil prices,” said Eric Theoret, global macro strategist at Manulife Investment Management.

“Domestic developments also assisted in the CAD’s intraday recovery as the stronger-than-expected CPI release helped firm expectations for near-term tightening from the BoC.”

Canada’s annual inflation rate unexpectedly accelerated to 7.7 per cent in May, the highest since January 1983, while the average of the Bank of Canada’s three core measures rose to 4.7 per cent from an upwardly revised 4.4 per cent.

The central bank has vowed to tame price pressures. Money markets see about an 80 per cent chance of a three-quarter-percentage-point rate increase at the BoC’s next policy announcement on July 13, up from 70 per cent before the inflation data, which would be the biggest hike in 24 years.

The price of oil, one of Canada’s major exports, fell as investors worried that rate hikes by the Federal Reserve could push the U.S. economy into a recession. U.S. crude prices settled 3 per cent lower at $106.19 a barrel.

Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year

fell 8.1 basis points to 3.419 per cent.

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