NEWS / Monetary Policy

Canada dollar jumps, bonds slip after data, Dodge

TORONTO - The Canadian dollar took flight against the greenback on Wednesday, as a growing stack of robust economic data stoked expectations for more interest rate hikes, even as Bank of Canada Governor David Dodge seemed to talk down such expectations.

Domestic bond prices finished lower on the outlook for more monetary tightening.

The currency finished at C$1.1092 to the U.S. dollar, or 90.16 U.S. cents, up from C$1.1176 to the U.S. dollar, or 89.48 U.S. cents, at Tuesday's close.

Canadian retail sales climbed a surprising 1.7 percent to a record high in April, blowing past forecasts of a 0.3 percent rise.

Coming on the heels of recent reports showing heady jobs growth and rising inflation, the data cemented expectations that a hot economy could force the Bank of Canada to continue raising interest rates.

"The last three reports that we've seen -- employment, CPI, and retail sales -- have been stunning, just stunning," said Steve Butler, director of foreign exchange at Scotia Capital.

The data pushed the currency to a one-week high of C$1.1032, or 90.65 U.S. cents, as traders anticipated higher yields on Canadian investments if the central bank boosts its overnight rate to 4.50 percent on July 11.

However, investors hoping for confirmation of this sentiment at a Montreal speech by Bank of Canada Governor David Dodge were disappointed, as the central banker said month-to-month indicators tend to be volatile, and noted that the bank makes its rate decisions with an eye to conditions 12 to 24 months down the road.

That pulled the currency back from its peak, but it still finished with strong gains, helped in part by oil prices that rose back above $70 per barrel.

Scotia's Butler said he still expects a rate hike, and read Dodge's comments as an attempt to keep the market from drawing firm conclusions from the data, particularly in light of the currency's recent rise to 28-year highs.

"The fact that commodities have softened and now (the Canadian dollar) is starting to get a little momentum again probably is not the best scenario for the Bank of Canada, because if the commodities catch fire again, then where does that leave the currency?" he said.