Canadian dollar strengthens as oil rally offsets inflation slowdown

February 27, 2019

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar strengthened against its U.S. counterpart on Wednesday, as higher oil prices offset tame domestic inflation data that supported a patient approach from the Bank of Canada on raising interest rates further.

Lower gasoline prices pulled Canada’s annual inflation rate in January down to 1.4 percent from 2.0 percent in December, reinforcing market expectations that imminent interest rate hikes are off the table.

“It keeps core inflation running below their (Bank of Canada) target mid-point, so it allows them to remain patient on hiking interest rates,” said Ryan Brecht, a senior economist at Action Economics.

The Bank of Canada, which targets an inflation rate of two percent, is widely expected to leave its benchmark interest rate on hold at 1.75 percent when it decides on policy next week.

The central bank has hiked 125 basis points since July 2017.

The price of oil, one of Canada’s major exports, was buoyed by an unexpected decline in U.S. crude inventories and after Saudi Arabia appeared undaunted by pressure from U.S. President Donald Trump on OPEC to prevent steeper price rises.

U.S. crude oil futures rose 2 percent to $56.62 a barrel.

At 9:11 a.m. (1411 GMT), the Canadian dollar was trading 0.3 percent higher at 1.3130 to the greenback, or 76.16 U.S. cents.

The currency, which touched on Monday its strongest in nearly three weeks at 1.3113, traded in a range of 1.3119 to 1.3176.

The loonie rose despite increased tensions between nuclear-armed neighbors India and Pakistan, which weighed on U.S. stocks.

Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasuries. The two-year fell 2.5 Canadian cents to yield 1.769 percent and the 10-year declined 18 Canadian cents to yield 1.887 percent.

Canada’s fourth-quarter gross domestic product data is due on Friday.

(Reporting by Fergal Smith; Editing by Bernadette Baum)

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