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* C$ hits session high of C$1.0207, or 97.97 U.S. cents
* Canada inflation eases in May from April, tops forecasts
By Jennifer Kwan
TORONTO, June 22 (Reuters) - The Canadian dollar firmed against the U.S. currency on Tuesday, supported by domestic inflation data that came in stronger than market expectations but eased from a month earlier.
The Canadian dollar CAD=D4 firmed to a session high of C$1.0207, or 97.97 U.S. cents after the report.
Data showed Canada's annual inflation rate slowed in May from April, suggesting less pressure on the Bank of Canada as it ponders the timing of its second interest rate hike following the recession. [ID:nN22110502]
The consumer price index gained 0.3 percent in the month for an annual rate of 1.4 percent, Statistics Canada said on Tuesday. The rate eased from 1.8 percent in April and was a notch above the consensus forecast of 1.3 percent.
Core CPI, closely watched by the central bank, came in higher but was still below the bank's 2 percent target at 1.8 percent. Analysts in a Reuters poll had forecast a 1.7 percent annual rate versus 1.9 percent in April.
"The CPI came in above expectations, with most of the underlying components seeing year-over-year gains," said Camilla Sutton, currency strategist at Scotia Capital.
"It's stronger than expected, which I think solidifies expectations the Bank of Canada will hike rates again in July. That is positive for the Canadian dollar."
At 8:10 a.m. (1210 GMT), the Canadian dollar was at C$1.0223 to the U.S. dollar, or 97.82 U.S. cents, up from Monday's close at C$1.0244 to the U.S. dollar, or 97.62 U.S. cents.
The bank raised its key rate on June 1 by a quarter-point to 0.5 percent. Markets widely expect another hike on July 20.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged lower following the data's release.
While that shows the market saw tightening as slightly less likely than before the data, the market was still pricing in a nearly 80 percent probability of a July hike. BOCWATCH
Canadian government bond prices were mixed, with yields little changed from before the data.
The two-year government bond CA2YT=RR sagged 2 Canadian cents to yield 1.747 percent, while the 10-year bond CA10YT=RR was up 5 Canadian cents to yield 3.321 percent. (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)