Dollar rallies on inflation data, bonds flat
TORONTO (Reuters) - The Canadian dollar raced higher against the U.S. dollar on Wednesday as above-target core inflation for October appeared to convince the market that the Bank of Canada may delay any potential interest rates cuts.
Domestic bonds prices tilted a touch lower after the inflation figures but clawed their way back shortly after and were mostly unchanged.
At 8:15 a.m. (1315 GMT), the Canadian unit was at C$1.1406 to the U.S. dollar, or 87.67 U.S. cents, up from C$1.1457 to the U.S. dollar, or 87.28 U.S. cents, at Tuesday’s close.
The Canadian dollar had reached as high as C$1.1402, or 87.70 U.S. cents, immediately after the report from pre-data levels around C$1.1435, or 87.45 U.S. cents.
Falling energy prices helped keep annual inflation in Canada under 1 percent for the second straight month in October but the core rate watched by the Bank of Canada stayed steady at 2.3 percent, above its target.
That is above the central bank’s target for core inflation at the midpoint of a 1 percent to 3 percent range.
And even though the Bank of Canada was not expected to alter its overnight rate until well into next year, the data helped prop up the Canadian dollar as it suggested an interest rate cut could take longer than anticipated.
“The immediate impact has been quite positive for the Canadian dollar and that’s largely because it shows that inflation is not completely dormant in Canada,” said David Watt, economist at BMO Capital Markets.
“We’re not going to get into any talk about Bank of Canada hiking rates but it certainly cuts off, for at least a little while, any talk that the Bank of Canada is going to be considering cutting rates anytime soon.”
The Bank of Canada’s overnight rate is steady at 4.25 percent, while the U.S. Federal Reserve’s fed fund rate remains at 5.25 percent. Both central banks have held monetary policy steady at their last three meetings.
With markets south of the border thinned out ahead of the U.S. Thanksgiving holiday on Thursday, traders have taken their lead from Canadian data and commodity prices all week.
Oil prices eased near $60 after a decent rally earlier in the week due partly to the disruption of Alaskan crude exports. Gold prices were steady.
BONDS LITTLE CHANGED
The domestic inflation data weighed slightly on domestic bond prices, but they quickly recovered the lost ground and were mostly unchanged.
“There was a very small sell-off immediately after the data release but it’s actually come back slightly,” said Kwan.
The two-year bond was down 2 Canadian cents at C$100.58 to yield 3.947 percent, while the 10-year bond was down 3 Canadian cents at C$100.02 to yield 3.997 percent.
The yield spread between the two-year and 10-year bond moved to 5.2 basis points from 5.9 at the previous close.
The 30-year bond fell 3 Canadian cents to C$126.95 to yield 4.077 percent. In the United States, the 30-year treasury yielded 4.663 percent.
The three-month when-issued T-bill yielded 4.17 percent, unchanged from the previous close.