NEWS / Government Ministries

Canada dollar dips after inflation data, bonds up

Domestic bond prices moved higher on the benign core inflation figure which makes a rate hike less certain and may even prompt the central bank to signal a pause going forward.

At 9:00 a.m. (1300 GMT), the currency was at C$1.1167 to the U.S. dollar, or 89.55 U.S. cents, down from C$1.1108, or 90.02 U.S. cents, just before the data was release.

The loonie closed at C$1.1140 to the U.S. dollar, or 89.77 U.S. cents, on Wednesday.

Canada's annual inflation rate rose to 2.4 percent in April, in line with expectations and up from 2.2 percent in March.

But core inflation, which excludes volatile items such as some fuels and food and is closely eyed by the Bank of Canada, dipped 0.1 percent in April after climbing 0.4 percent in March. The core rate was 1.6 percent on the year, down from 1.7 percent in March.

The impact on the currency was immediate as market players began to speculate on the likelihood of a seventh consecutive interest rate hike by the Bank of Canada on May 24.

"All of this creates a very tough decision for the Bank of Canada. Frankly if I were them, I would not go," said Marc Levesque, chief strategist at TD Securities.

"But I think given their tough talk in the Monetary Policy Report, they still have a bit of a bias toward hiking. So I'd say there is a razor-thin chance that they will still increase interest rates next week."

Prior to the data, the Bank of Canada was expected to raise its overnight rate to 4.25 percent next week, although some have suggested the bank may leave rates unchanged.

The Canadian inflation data follows stronger-than-expected inflation figures out of the U.S. on Wednesday that suggested the U.S. Federal Reserve may raise interest rates one more time before pausing. The fed funds rate currently stands at 5 percent.

BONDS RISE ON TAME CORE INFLATION DATA