(Adds economists' comments, details on data, updates prices)
By Alastair Sharp
TORONTO, June 20 The Canadian dollar firmed to
its strongest level since the first week of 2014 on Friday after
surprisingly high Canadian inflation data and robust retail
sales increased speculation that the central bank will soon have
to shift its policy stance.
The Bank of Canada warned investors just last week that low
inflation is a lingering concern, signaling to markets its
reluctance to raise interest rates. But the twin data points
jolted the currency about half a cent stronger as it forced
traders to rethink the rate outlook.
"Expectations of rate cuts have been pretty much eliminated
here in Canada," said Paul Ferley, assistant chief economist at
Royal Bank of Canada. "We will start seeing some speculation
about whether rate hikes will start to come sooner rather than
Yields on government debt also spiked, most noticeably at
the short end of the curve. And yields on overnight index swaps,
which trade based on expectations for the policy rate, showed
that the already slight expectation of a cut later this year had
Costlier energy pushed annual inflation to a 27-month high
of 2.3 percent in May from 2.0 percent in April, while a rise in
core inflation also defied the Bank of Canada's low-inflation
"Both of those are way higher than the Bank of Canada
estimated back in April," said Krishen Rangasamy, senior
economist at National Bank Financial.
He said the bank, which he believes would like to keep the
currency weaker to stoke demand for Canadian exports, could yet
try to present the inflation jump as a temporary blip.
"I think they are going to keep spinning that story as long
as they can, to keep the Canadian dollar from heading back
towards parity," he said.
Retail sales data in April also boosted the currency, with
auto sales leading the figure to its strongest gain in 11 months
and pointing to a likely bounce in gross domestic product for
The currency last traded at C$1.0759 to the U.S. dollar, or
92.95 U.S. cents, just off its strongest level of the session.
It closed on Thursday at C$1.0823, or 92.40 U.S cents.
It briefly touched C$1.0752, its firmest level since Jan. 7.
Canadian government bond prices were sharply lower, with the
two-year issue down 12 Canadian cents to yield 1.137
percent and the benchmark 10-year bond shedding 50
Canadian cents to yield 2.318 percent.
The yield on the two-year was at its highest since early
(Editing by Jeffrey Hodgson; and Peter Galloway)