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The Canadian dollar CADUSD edged lower against its U.S. counterpart on Friday but held on to a weekly gain, as higher oil prices and the prospect of additional Bank of Canada interest rate hikes offset preliminary data showing that retail sales fell in August.

The loonie was trading 0.1 per cent lower at 1.3490 to the greenback, or 74.13 U.S. cents, after moving in a range of 1.3424 to 1.3491. For the week, the currency was up 0.2 per cent, its second straight week of gains.

“Stronger-than-expected Canadian inflation data helped lift the CAD this week,” said Shaun Osborne, chief currency strategist at Scotiabank. “The inflation data boosts the risk of forcing the Bank of Canada to tighten its policy rate again.”

Canada’s annual inflation rate in August jumped to 4.0 per cent from 3.3 per cent in July on higher gasoline prices, data showed on Tuesday.

Canada’s record of declining productivity over the past three years is likely to make it more difficult for the BoC to tame inflation, raising the prospect of additional interest rate hikes even as the economy slows.

Money markets see a 45 per cent chance of a rate increase at the BoC’s next policy announcement on Oct. 25, while further tightening is fully priced in to the market by March.

Data on Friday showed that Canadian retail sales grew by 0.3 per cent in July from June, but were likely down 0.3 per cent in August.

The price of oil, one of Canada’s major exports, settled 0.5 per cent higher at $90.03 a barrel, moving closer to the 10-month high posted earlier in the week.

Canadian government bond yields eased across the curve, tracking moves in U.S. Treasuries. The 10-year was down 6.6 basis points at 3.907 per cent, after earlier touching its highest intraday level since January 2008 at 3.990 per cent.

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