CANADA FX DEBT-Canadian dollar climbs to 4-1/2-month high on inflation surprise

Fergal Smith
2-min read
In this article:

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Canadian dollar strengthens 0.4% against the greenback

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Touches its strongest since Aug. 4 at 1.3334

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Canada's annual inflation rate holds steady at 3.1%

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Canada-U.S. 2-year spread narrows by 3 basis points

(Adds details throughout and updates prices)

By Fergal Smith

TORONTO, Dec 19 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as investors reduced bets on the Bank of Canada shifting to interest rate cuts in the coming months after domestic data showed inflation unexpectedly holding steady in November.

The loonie was trading 0.4% higher at 1.3340 to the greenback, or 74.96 U.S. cents, after touching its strongest intraday level since Aug. 4 at 1.3334.

Canada's annual inflation rate remained at 3.1% in November, surprising analysts who had forecast inflation would ease to 2.9%. CPI-median and CPI-trim, two measures of core inflation closely watched by the BoC, also held steady at 3.4% and 3.5%, respectively.

The underlying inflation readings "leaned more toward continued hike risk" than toward the market's expectation for a cut by March or April, Derek Holt, head of capital markets economics at Scotiabank, said in a note.

A cut in the coming months "would be a major policy error right into the thick of the Spring housing market and Winter government budget season," Holt added.

Money markets see a roughly 40% chance the BoC will begin easing in March, down from 50% before the data.

This month, the central bank held its benchmark rate at a 22-year high of 5% and left the door open to another hike, saying it was still concerned about inflation while acknowledging an economic slowdown.

Adding to support for the loonie, the price of oil, one of Canada's major exports, settled 1.3% higher at $73.44 a barrel amid concerns about supply disruptions and the U.S. dollar lost ground against a basket of major currencies.

The Canadian 2-year yield rose 1.2 basis points to 4.007%, while the gap between it and its U.S. equivalent narrowed by 3 basis points to 43.2 basis points in favor of the U.S. note. (Reporting by Fergal Smith; Editing by Josie Kao)