Canadian dollar gains as accelerating inflation raises rate hike prospects

NEW YORK (Reuters) - The Canadian dollar gained against its U.S. counterpart on Friday after the country’s annual inflation rate accelerated by more than expected, increasing prospects that the Bank of Canada might raise interest rates next month.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Canada’s annual inflation rate rose 3 percent in July versus 2.5 percent the previous month as energy prices climbed. Economists polled by Reuters had forecast 2.5 percent annual inflation.

At 9:35 a.m. EDT (1335 GMT), the Canadian dollar CAD=D4 was trading 0.56 percent higher at C$1.3078 to the greenback, or 0.7644 U.S. cents. On Monday, it neared a three-week low of C$1.3179.

“With that size of a shock, (the Canadian dollar) probably should have moved more,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

“This really does raise the possibility of the Bank of Canada raising rates in September again.”

Money markets expect the central bank to hike its benchmark interest rate, which sits at 1.50 percent, once more by December.

The CPI data came a day after a report from Statistics Canada that showed Canadian factory sales grew by 1.1 percent in June from May, a positive sign for manufacturing.

Markets remained broadly bullish on the U.S. dollar amid uncertainty around trade, Anderson said.

U.S. Trade Representative Robert Lighthizer on Thursday said he hoped there would be a breakthrough in NAFTA trade talks in the next few days.

The 10-year yield CA10YT=RR rose to 2.262 percent, from 2.256 percent late on Thursday.

Reporting by James Thorne; Editing by Susan Thomas