CANADA FX DEBT-C$ jumps to 5-1/2 month high on firm inflation, retail data

Fri Jun 20, 2014 10:46am EDT
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(Adds economists' comments, details on data, updates prices)

By Alastair Sharp

TORONTO, June 20 (Reuters) - The Canadian dollar firmed to its strongest level since the first week of 2014 on Friday after surprisingly high Canadian inflation data and robust retail sales increased speculation that the central bank will soon have to shift its policy stance.

The Bank of Canada warned investors just last week that low inflation is a lingering concern, signaling to markets its reluctance to raise interest rates. But the twin data points jolted the currency about half a cent stronger as it forced traders to rethink the rate outlook.

"Expectations of rate cuts have been pretty much eliminated here in Canada," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "We will start seeing some speculation about whether rate hikes will start to come sooner rather than later."

Yields on government debt also spiked, most noticeably at the short end of the curve. And yields on overnight index swaps, which trade based on expectations for the policy rate, showed that the already slight expectation of a cut later this year had disappeared.

Costlier energy pushed annual inflation to a 27-month high of 2.3 percent in May from 2.0 percent in April, while a rise in core inflation also defied the Bank of Canada's low-inflation forecasts.

"Both of those are way higher than the Bank of Canada estimated back in April," said Krishen Rangasamy, senior economist at National Bank Financial.

He said the bank, which he believes would like to keep the currency weaker to stoke demand for Canadian exports, could yet try to present the inflation jump as a temporary blip.   Continued...