Canada Dollar Reaches One-Week High on Jump in Inflation

Canada’s dollar advanced to the strongest level in a week after an inflation gauge rose in June for a second month past the central bank’s 2 percent target.

The currency gained versus most of 16 major peers after the consumer price index increased 2.4 percent from a year earlier, the fastest in more than two years, the government reported. The data came two days after the Bank of Canada said inflation gains are temporary and held the benchmark interest rate at 1 percent. Hedge-fund managers and other large speculators stayed bullish on the currency for a third week.

“The market was positioned for Canadian-dollar weakness following the Bank of Canada, and I think the market was caught off-guard,” Adam Button, a currency analyst at in Montreal, said in a phone interview.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, appreciated 0.3 percent to C$1.0733 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0709, the strongest level since July 11. One Canadian dollar buys 93.17 U.S. cents.

The currency was little changed for the week. It lost 0.8 percent in the five days ended July 11 after gaining for the previous four weeks.

Net Longs

Futures bets by large speculators for the loonie to rise against the U.S. dollar outnumbered bets for it to fall -- called net longs -- by 15,621 contracts as of July 15, the most since February 2013, according to data released today by the Washington-based Commodity Futures Trading Commission. Bets were reversed from a net-short position July 4 for the first time in 70 weeks.

Canada’s government bonds fell, pushing the yield on the benchmark 10-year security up from the lowest level in more than a year. It added three basis points, or 0.03 percentage point, to 2.16 percent after dropping to as low as 2.13 percent yesterday, the least since June 2013.

The price of the 2.5 percent debt maturing in June 2024 decreased 24 cents to C$103.

Consumer-price increases were led by higher food and clothing costs. Economists surveyed by Bloomberg forecast the CPI would hold at 2.3 percent, its May level. The gauge reached 2 percent in April for the first time in two years.

A separate report from Statistics Canada showed wholesale sales exceeded all economist forecasts in May, rising 2.2 percent to C$52.6 billion ($48.9 billion). Automobile sales led the advance. The median projection was a 0.6 percent gain.

Weak Economy

The loonie reached the weakest level in almost a month on July 16, C$1.0794, after Bank of Canada Governor Stephen Poloz said persistent sluggishness in the nation’s economy will curb a temporary acceleration of inflation caused by one-time gains in energy and import prices.

“Maybe he was wrong on that,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal, said in a phone interview after today’s report. “He seems really confident that inflation is not going to persist at these levels. I guess we will have to see whether he was right or not.”

The central bank remained neutral this week on whether the next interest-rate move will be up or down. It has kept borrowing costs unchanged since 2010 to support the economy. Policy makers’ monetary-policy report cut the forecasts they made in April for Canada’s growth this year to 2.2 percent from 2.3 percent.

Exports, Investment

Poloz is counting on a rotation to business investment and exports from spending by indebted consumers to lead Canadian economic growth.

“They want a weaker Canadian dollar if they can manufacture it,” said Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce, in a telephone interview from Toronto. “The CPI data is getting to a point where it’s getting harder to dismiss.”

The loonie has swung between a 4 1/2 year low and a six-month high this year as investor speculation fluctuated on when interest rates might be raised.

The Canadian dollar slumped in March to C$1.1279, the weakest level since July 2009, after Poloz said he couldn’t rule out a rate cut to head off the risk that low inflation would slip into deflation.

The currency rebounded as consumer prices increased, reaching C$1.0621 on July 3, the strongest level since Jan. 6.

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