April 19, 2011 / 11:18 AM / in 7 years

CANADA FX DEBT-C$ rises, bonds fall, as CPI spurs rate hike talk

* Canada March inflation soars above target range

* Odds for rate rises from July onward gain

* C$ firms to one week high at $1.0443

* Bonds slide across the curve

By Ka Yan Ng

TORONTO, April 19 (Reuters) - The Canadian dollar firmed to a one-week high on Tuesday after data showed Canada’s annual inflation rate in March jumped to its highest level since September 2008, ratcheting up pressure on the Bank of Canada to resume raising interest rates soon.

On a year over year basis, the inflation rate in March shot up to 3.3 percent from 2.2 percent in February, well above market expectations, and above the Bank of Canada’s target range. The core rate remained tame, but was still higher than market forecasts. [ID:nN19160402]

“It was strong across the board, even the seasonally-adjusted numbers made significant month-over-month gains,” said Camilla Sutton, chief currency strategist, at Scotia Capital.

“Inflationary pressure has begun to enter Canada and this will significantly change the market’s expectation of what the Bank of Canada will do in terms of interest rates.”

Canada’s dollar CAD=D4 hit its highest in a week at C$0.9576 to the U.S. dollar, or $1.0443, shortly after the data’s publication, adding to slight gains made overnight and up from Monday’s close at C$0.9642 to the U.S. dollar, or $1.0371.

At 7:42 a.m. (1142 GMT), the currency was several ticks off the session high at C$0.9578 to the U.S. dollar, or $1.0440.

Canadian bond prices slid across the curve as market players priced in an increased probability of higher rates at every announcement date this year from July to December.

The surprise jump in headline CPI could prompt the Bank of Canada -- which targets inflation at the midpoint of a 1 percent to 3 percent range -- to raise its key overnight target rate earlier than previously thought, analysts said.

Yields on overnight index swaps, which trade based on expectations for the policy rate, continue to see almost no chance of a rate increase on May 31, the next policy-setting meeting, and have fully priced in a quarter-point interest rate rise by September. BOCWATCH

The two-year bond CA2YT=RR dropped 17 Canadian cents to yield 1.787 percent, while the 10-year bond CA10YT=RR lost 38 Canadian cents to yield 3.283 percent. (Editing by Theodore d‘Afflisio)

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