Canada Dollar Rises Versus Majors on Biggest CPI Gain Since 1991

Canada’s dollar gained versus a majority of its most traded peers after consumer prices rose at the fastest monthly pace in more than 20 years in February, raising speculation that interest rates will rise.

The currency fluctuated against the U.S. dollar after gaining to the strongest level in a month as commodities advanced and consumer prices climbed 1.2 percent last month, the biggest gain since January 1991 when the country implemented a new sales tax, Statistics Canada said. The so-called loonie fell earlier as concern over the bailout for Cyprus and a political deadlock in Italy undermined demand for higher-yielding assets.

“In the morning, the stronger-than-expected inflation number supported the loonie, and then energy prices supported it later,” Emanuella Enenajor, an economist at Canadian Imperial Bank of Commerce’s CIBC World Markets unit in Toronto, said by phone. “The Canadian dollar was supported by a combination of the two.”

The loonie was little changed at C$1.0160 per U.S. dollar in Toronto at 5 p.m. after touching C$1.0150, the strongest since Feb. 22. It earlier fell as much as 0.3 percent. One Canadian dollar buys 98.43 U.S. cents.

Canada’s benchmark 10-year government bonds jumped, lowering yields by six basis points, or 0.06 percentage point, to 1.75 percent, the lowest since Dec. 12. The 2.75 percent security maturing in June 2022 increased 54 cents to C$108.41, the highest since Jan. 1.

Bond Auction

The Bank of Canada sold C$2.9 billion ($2.9 billion) of 10-year notes today at an average yield of 1.882 percent, with a bid-to-cover ratio of 2.36. The last auction of the notes on Jan. 30 yielded 2.112 percent with a bid-to-cover ratio of 2.15 percent.

Futures on crude oil gained 0.3 percent to $96.64 per barrel in New York after touching $96.84, the highest point since Feb. 20. Prices have risen 4.9 percent this month.

The discount between the Canadian and American benchmark crude oil blends was at C$15.25 today, the narrowest since Oct. 15. It’s down from a record C$42.50 on Dec. 14. Oil is Canada’s largest export and the U.S. is the nation’s biggest export destination.

“The oil picture has swung substantially in the Canadian dollar’s favor in the past month,” Adam Button, a currency analyst at in Montreal, said by phone. “Oil trades have been a tailwind for the loonie.”

Inflation Rate

Traders are the least bearish on the loonie in almost two months, as so-called risk-reversals show options traders are paying the least for protection against loonie weakness since Feb. 5. The three-month 25-delta risk reversal rate touched 0.92 percentage point from as much as 1.49 percentage points on Feb. 26, its highest since Sept. 7.

The loonie erased earlier losses versus the greenback as consumer prices were up 1.2 percent from a year earlier, the highest since October, following a 0.5 percent gain in January. The annual core inflation rate, which excludes eight volatile items, accelerated to 1.4 percent from 1 percent in January, the Ottawa-based agency said.

Economists predicted total inflation would accelerate to 0.8 percent and the core rate would be 1 percent, according to median estimates.

The CPI number “does give it stronger tailwind to keep the Bank of Canada on track for an eventual rate increase,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by phone from Washington. “The Canadian dollar has taken more of its cues from the improving U.S. growth story, and that could have positive effects on Canada’s economy.”

Carney’s View

Central-bank Governor Mark Carney reiterated to lawmakers last month in Ottawa a rate boost from the current 1 percent is less urgent than previously anticipated because the weaker-than-expected economy is keeping inflation below the bank’s 2 percent target.

Canada’s economy grew 0.1 percent in January after shrinking 0.2 percent the month before, according to the median estimate of a Bloomberg survey of 24 economists before the government reports the data tomorrow.

Canada’s dollar gained versus the euro as a bailout for Cyprus and a political deadlock in Italy undermined demand for the region’s assets.

Cyprus’s banks will open for six hours tomorrow with capital restrictions in place after staying shut for almost two weeks as the island nation faced financial collapse.

In Italy, Democratic Party head Pier Luigi Bersani was rejected by leaders of Beppe Grillo’s Five Star Movement after their talks aimed at forming a governing coalition were broadcast live on the Internet.

The Canadian dollar has gained 0.9 percent in the past three months against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes. The U.S. dollar has picked up 3 percent, while the euro has fallen 0.8 percent.