Canadian dollar notches seven-week high as core inflation rises

TORONTO (Reuters) - The Canadian dollar strengthened to a seven-week high against its U.S. counterpart on Wednesday after data showing a pickup in underlying inflation tempered bets that the Bank of Canada would cut interest rates over the coming months.

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 2.2% as expected in November on the back of higher energy prices, while the average of the Bank of Canada’s three measures of core inflation rose to 2.2% from 2.1%, data from Statistics Canada showed.

“It does make for a more challenging environment to follow some of the other central banks in easing,” said Robert Both, a macro strategist at TD Securities.

The Bank of Canada has left its policy rate unchanged at 1.75% this year despite easing by the Federal Reserve and the European Central Bank. Chances of an interest rate cut by the end of 2020 fell to less than 20% from about 25% before the data, the overnight index swaps market indicated. BOCWATCH

Separate data showed that Canadian home prices rose in November, which is often a slow month for the market. The Teranet-National Bank Composite House Price Index rose 0.2% last month from October.

At 2:54 p.m. (1954 GMT), the Canadian dollar CAD=D4 was trading 0.3% higher at 1.3113 to the greenback, or 76.26 U.S. cents. The currency posted its strongest intraday level since Oct. 30 at 1.3103.

Over the past week, the loonie has been supported by the Federal Reserve’s benign inflation outlook and by a trade deal between the United States and China. Canada is a major exporter of commodities, including oil, so its economy could benefit from an improved outlook for global trade.

U.S. crude oil futures CLc1 held near a three-month high as U.S. government data showed a decline in crude inventories and on expectations for an uptick in demand next year on the back of progress in resolving the U.S.-China trade fight.

Canadian government bond prices were lower across a steeper yield curve, with the two-year CA2YT=RR down 6 Canadian cents to yield 1.737% and the 10-year CA10YT=RR falling 68 Canadian cents to yield 1.710%.

The 10-year yield touched its highest intraday level since May 22 at 1.719%.

Reporting by Fergal Smith; Editing by Steve Orlofsky and Peter Cooney