TORONTO (Reuters) - The Canadian dollar notched a one-week high against its broadly weaker U.S. counterpart on Friday as a spike in domestic inflation offset a drop in oil prices.
Canada’s annual inflation rate unexpectedly jumped to 2.1 percent in January, its highest in more than two years.
“It is a pretty eye-catching number,” said Andrew Kelvin, senior rates strategist at TD Securities.
The chances of a Bank of Canada interest rate hike this year rose to nearly 30 percent from 24 percent before the inflation report, data from the overnight index swaps market showed. BOCWATCH
But economists said the central bank will be untroubled by the headline rise, which was driven by higher gasoline prices.
“My sense is that the Bank of Canada will look through this just given that all three measures of core (inflation) are running below two percent,” Kelvin said.
The U.S. dollar .DXY weakened as the “Trumpflation trade” that took the greenback to 14-year highs earlier this year faded, and as worries over France’s presidential election eased.
U.S. crude CLc1 prices were down 0.92 percent at $53.95 a barrel after U.S. crude inventories rose for a seventh week. [O/R]
Oil is one of Canada’s major exports.
At 9:25 a.m. ET (1425 GMT), the Canadian dollar CAD=D4 was trading at C$1.3101 to the greenback, or 76.33 U.S. cents, stronger than Thursday’s close of C$1.3114, or 76.25 U.S. cents.
The currency’s weakest level of the session was C$1.3119, while it touched its strongest since Feb. 16 at C$1.3057.
Gains for the loonie came one day after U.S. Treasury Secretary Steven Mnuchin said he does not see any changes to the North American Free Trade Agreement in the short term.
Canada sends 75 percent of its exports to the United States and could suffer badly if U.S. President Donald Trump follows through on promises to renegotiate NAFTA.
In an interview with Reuters on Thursday, Trump spoke favorably about a potentially export-boosting border adjustment tax being pushed by Republicans in the U.S. Congress, but did not specifically endorse it.
The loonie would be among the biggest losers if the border tax is implemented, analysts say.
Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR rose 0.5 Canadian cent to yield 0.765 percent and the 10-year CA10YT=RR climbed 25 Canadian cents to yield 1.639 percent.
The 10-year hit its lowest intraday since Feb. 9 at 1.637 percent.
Reporting by Fergal Smith; Editing by Andrea Ricci