Canadian dollar storms higher after CPI

Wed May 21, 2008 11:31am EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar shot to its highest level in more than two months versus the U.S. dollar on Wednesday as domestic inflation data came in ahead of estimates and forced the market to reconsider whether the Bank of Canada will need to reduce interest rates further.

Domestic bond prices held positive shortly after the data but eventually all turned lower across the curve as the data supported calls for fewer, if any, Bank of Canada rate cuts.

At 8:40 a.m. EDT, the Canadian currency was at US$1.0150, valuing a U.S. dollar at 98.52 Canadian cents, up from US$1.0082, valuing a U.S. dollar at 99.18 Canadian cents, at Tuesday's close.

The latest rise in the domestic currency came immediately after data showed annual inflation in Canada beat expectations in April, rising to 1.7 percent on gasoline price hikes.

The currency rose to US$1.0184, valuing a U.S. dollar at 98.19 U.S. cents, right after the data, from a pre-data level around US$1.0138, valuing a U.S. dollar at 98.64 Canadian cents.

"The Canadian dollar strengthened substantially and it all circles back around to this report and the monetary policy implications that stem from it," said Eric Lascelles, chief economics and rates strategist at TD Securities.

"In terms of the implications for the Bank of Canada I would say it certainly strikes a blow against the argument for a 50-basis-point cut and probably in favor of a 25-basis-point cut."

The Bank of Canada's next rate announcement is June 10 and a Reuters poll taken last month showed expectations of Canadian primary dealers ranged from an interest rate cut of 25 basis points to a 50 basis point cut.   Continued...