Canada’s Dollar Climbs Most in 2011 as Inflation Beats Forecast

Canada’s dollar climbed the most since December versus its U.S. counterpart after consumer prices rose more than forecast, prompting traders to ratchet up bets the central bank will resume raising interest rates.

The currency strengthened versus a majority of its 16 most-traded peers as stocks and commodities rose after Greek lawmakers approved a package of austerity measures amid a 48-hour strike and protests. The gain cut the Canadian dollar’s monthly loss to 0.1 percent. A government report tomorrow will show the nation’s gross domestic product contracted in April, economists predict.

“Things look better for the moment, but it’s far from over,” said David Love, a trader of interest-rate derivatives at Le Groupe Jitney Inc. in Montreal. “Tomorrow’s GDP will be crucial, as will the ongoing crisis in Greece.”

The loonie, as the currency is also known for the image of the aquatic bird on the C$1 coin, appreciated 1.2 percent to 96.95 cents per U.S. dollar at 5 p.m. in Toronto, from 98.12 cents yesterday. It gained the most on an intraday basis, 1.2 percent, since Dec. 2. One Canadian dollar buys $1.0315. The loonie gained 0.1 percent for the quarter.

Canada’s government bonds dropped, pushing the yield on Canada’s benchmark 10-year note up 10 basis points to 3.08 percent. It touched 3.10 percent, the highest level this month. A basis point is 0.01 percentage point. The 3.25 percent security due in June 2011 tumbled 85 cents to C$101.42.

Consumer Prices

The currency gained for a third day versus the greenback, the longest winning streak in a month, as Statistics Canada reported consumer prices climbed 3.7 percent in May from a year earlier. It was the fastest pace since 2003 and exceeded all 24 forecasts in a Bloomberg News survey of economists, whose median projection was for a 3.3 percent increase, the same as in April.

The core inflation rate, which excludes eight volatile items such as gasoline, accelerated to 1.8 percent from a year earlier. Economists had forecast it would slow to 1.5 percent.

Government data due tomorrow will show Canada’s GDP contracted 0.1 percent in April from the previous month, according to the median of 22 forecasts compiled by Bloomberg. The report is due at 8:30 a.m. Ottawa time. The economy grew 0.3 percent in March.

“Any fear about rates that has crept into the market in the aftermath of the CPI data may be tempered by the GDP data,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto. “It’s expected to be weak and underscore the headwinds facing the economy.”

Greek Plan

The euro rose versus the greenback, which fell against most of its major peers, after Greece’s parliament passed Prime Minister George Papandreou’s 78 billion euro ($112 billion) package of budget cuts and state asset sales.

The measures were needed before the nation can tap a fifth portion of last year’s rescue and win a second aid package from the European Union and the International Monetary Fund. Greek lawmakers vote tomorrow on a bill to implement the plan.

“Contagion fear and social unrest will again have the markets paring risk and directly affecting the loonie, again pressurizing the currency after printing new highs after the CPI data,” said Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp. “Short-term speculators are looking to sell the Canadian dollar on these U.S. dollar pullbacks.”

The Bank of Canada kept its benchmark overnight lending rate at 1 percent on May 31, where it has been since September. Policy makers are expected to raise the rate to 1.5 percent by year-end, according to forecasts compiled by Bloomberg.

Rate Bets

December 2011 bankers’ acceptances, the most active contract, yielded 1.47 percent, the most in two weeks, after falling to 1.36 percent on June 24, the lowest closing price since they started trading in December 2008. The yield on so-called Baxes averages about 18 basis points above the central bank’s overnight target, Bloomberg data since 1992 show.

“Today’s number was considerably above expectations,” said Le Groupe Jitney’s Love. “That, combined with the austerity measures in Greece, has sent BAX contracts lower.” The yield rises as the price falls.

While today’s CPI report gives the central bank “food for thought,” much of the pressure appears to be seasonal and the core inflation rate remains below the bank’s target of 2 percent, TD Securities’ Osborne said.

“There’s no urgency for the Bank of Canada at this stage,” he said.

The Standard & Poor’s 500 Index increased 0.6 percent. Crude oil for August delivery gained as much as 3.2 percent to $95.84 a barrel in New York, the highest level since June 15, before trading at $95.10, up 2.4 percent. Oil is Canada’s biggest export.

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