CANADA FX DEBT-C$ hits 5-week high as oil, gold, inflation rise

* Dollar touches five-week high after inflation data

* Annual inflation rate surged unexpectedly in February

* Higher commodity prices also help lift currency

* Bonds nudge lower at short end, higher at long end

(Adds details, quotes)

By Jennifer Kwan

TORONTO, March 19 (Reuters) - The Canadian dollar strengthened to a five-week high against the U.S. currency on Thursday, boosted by higher commodity prices and data showing an unexpectedly large jump in inflation.

Statistics Canada said annual inflation jumped to 1.4 percent in February from 1.1 percent in January despite declines in gasoline and vehicles prices compared with a year earlier. [ID:nN19500487]

The news helped lift the Canadian dollar to its highest level since Feb. 10.

“The inflation report was stronger than expected and, at the margin, reduces the potential of the Bank of Canada matching the Fed’s maneuvers,” said Sal Guatieri, senior economist, BMO Capital Markets.

“It means the Bank of Canada may not print as many Canadian dollars as the Fed is printing U.S. dollars. In a relative sense, fewer Canadian dollars floating around than American dollars, which increases the value of our currency.”

At 10:18 a.m. (1418 GMT), the Canadian dollar was at C$1.2302 to the U.S. dollar, or 81.29 U.S. cents, up from Wednesday’s close at C$1.2463 to the U.S. dollar, or 80.24 U.S. cents.

Ahead of the data, the unit was at C$1.2396 to the U.S. cents, or 80.67 U.S. cents. But in the wake of the report, the currency touched C$1.2192, or 82.02 U.S. cents, its highest level since Feb. 10.

The Canadian dollar added to big gains made on Wednesday after the U.S. Federal Reserve said it would buy up to $300 billion worth of longer-term U.S. government debt and expand purchases of mortgage-related debt to help ease credit market conditions. [ID:nSP419864]

A major factor driving Canadian dollar strength is what happens to the U.S. dollar, said Paul Ferley, assistant chief economist Royal Bank of Canada.

“The actions by the (U.S. Federal Reserve) yesterday with an aggressive easing move put a fair bit of downward pressure on the U.S. dollar to the benefit of Canada,” he said. “That’s probably the more dominant trend right now.”

Because the U.S. dollar is weak, “commodity prices are on fire,” added Guatieri.

“That is always good news for the loonie,” he said. The Canadian currency is nicknamed the loonie after the bird that appears on one side of the dollar coin.

Oil CLc1 shot up more than 6 percent to above $51 a barrel on Thursday after the Fed's move fuelled expectations the U.S. economy could soon begin its recovery. [ID:nLJ369363] Gold XAU= climbed above $950 an ounce.


Canadian bonds prices were lower at the front end but higher at the middle of the curve, extending gains made in the previous session prompted by the Fed’s unexpected move.

“It’s all trading off the U.S. developments,” said Guatieri. “The Fed will be buying U.S. Treasuries over the next few weeks, and that’s helping the longer issues rally at the expense of short term issues.”

“That demand should push up the price of U.S. Treasuries, which then spills over into the Canadian market.”

The two-year bond nudged lower by 3 Canadian cents to C$102.96 to yield 0.981 percent. The 10-year bond rose 15 Canadian cents to C$109.40 to yield 2.689 percent.

The 30-year bond climbed 10 Canadian cents to C$125.90 to yield 3.540 percent. The U.S. 30-year bond yielded 3.5682 percent.

Canada bonds largely underperformed U.S. Treasuries across the curve, with the exception of the 30-year maturity where the yield was 2.8 basis points below its U.S. counterpart. On Wednesday, the Canadian 30-year yield was higher than the U.S. yield. (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)