Hot inflation data helps lift Canadian dollar to 6-week high

By Fergal Smith

TORONTO (Reuters) -The Canadian dollar strengthened to a six-week high against its U.S. counterpart on Tuesday, before giving back some of its gains, as hotter-than-expected inflation data bolstered bets for additional tightening by the Bank of Canada.

The Canadian dollar was trading 0.3% higher at 1.3440 to the greenback, or 74.40 U.S. cents, after touching its strongest intraday level since Aug. 10 at 1.3383.

Canada's annual inflation rate in August jumped to 4.0% from 3.3% in July on higher gasoline prices. Analysts polled by Reuters had forecast inflation would hit 3.8%.

"Today's above-consensus print is likely to lift market-implied odds on a final hike at the Bank of Canada's October meeting," Karl Schamotta, chief market strategist at Corpay, said in a note. "The oversold nature of the Canadian dollar going into the release suggests that exchange rate gains could be generated in the shorter term."

Speculators have raised their bearish bets on the Canadian dollar to the highest since May, data from the U.S. Commodity Futures Trading Commission showed on Friday.

Money markets see a roughly 40% chance that the Canadian central bank will raise interest rate in October, up from 23% before the inflation data, after pausing its tightening campaign earlier this month. The BoC's benchmark rate is at a 22-year high of 5%.

Recent volatility in headline inflation is not unusual but the underlying trend shown by core measures was inconsistent with bringing inflation down to the 2% target, BoC Deputy Governor Sharon Kozicki said.

The price of oil, one of Canada's major exports, settled 0.3% lower at $91.20 a barrel after earlier touching a 10-month high.

Canadian government bond yields climbed across the curve. The 10-year touched its highest level since October 2008 at 3.874% before dipping slightly to 3.858%, up 10.6 basis points on the day.

(Reporting by Fergal Smith, Editing by Nick Zieminski and Sandra Maler)