Loonie jumps to two-week high on CPI

Thu Jun 19, 2008 9:27am EDT
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By John McCrank

TORONTO (Reuters) - The Canadian dollar rose to its highest point in two weeks against the U.S. dollar on Thursday, after gas prices powered the annual inflation rate higher than expected, firming views the Bank of Canada will not cut interest rates further.

Domestic bond prices fell on the interest rate outlook.

At 9:14 a.m. EDT the Canadian dollar was at C$1.0118 to the U.S. dollar, or 98.83 U.S. cents, up from C$1.0181 to the U.S. dollar, or 98.22 U.S. cents, at Wednesday's close.

The currency rose 0.6 percent, to its highest point since June 4, after the inflation data. Inflation jumped 2.2 percent in May, from a 1.7 percent rise in April, on sharply higher gasoline prices. Analysts had, on average, expected a year-on-year inflation rate of 1.9 percent.

"It makes the risk of a Canadian (interest rate) hike that much greater," said Adam Cole, head currency strategist at RBC Capital Markets in London.

The Bank of Canada held interest rates steady last week, confounding market expectations for a 25 basis point cut, as it shifted its focus to inflation from worries about growth.

The market will now look to a speech late Thursday by Bank of Canada Governor Mark Carney in Calgary, on "Capitalizing on the Commodity Boom: The Role of Monetary Policy" for more clues to the central bank's thinking.

RBC's Cole said the rising inflation rate may well color the Bank of Canada's attitude to the exchange rate.   Continued...