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C$ rallies as hot inflation data supports rate hike bets

·2 min read
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a two-week high against its U.S. counterpart on Wednesday as domestic inflation data bolstered expectations for another upsized interest rate hike from the Bank of Canada.

Canada's annual inflation rate accelerated more quickly than expected in March, hitting a 31-year high of 6.7%, amid broad price pressures.

"Today's CPI release confirms that the BoC took the right track when embarking on a 50 basis point hike last week," said Simon Harvey, FX market analyst for Monex Europe and Monex Canada. "If May's data shows the pace of shelter and food inflation continues to be robust, we expect the BoC to go back-to-back with 50 basis point hikes."

The Bank of Canada last week raised its benchmark rate by half a percentage point, its biggest single hike in more than two decades, and opened the door to lifting interest rates above a neutral setting for the first time in 14 years. Its next policy decision is due on June 1.

The central bank's goal of taming inflation without triggering a recession, a so-called soft landing, is challenged by the numerous drivers of price pressures and record-high household debt.

The Canadian dollar was trading 0.9% higher at 1.2505 to the greenback, or 79.97 U.S. cents, after touching its strongest level since April 5 at 1.2473.

The gain for the loonie came as the U.S. dollar fell against a basket of major currencies and the price of oil, one of Canada's major exports, clawed back some of the previous session's sharp losses. U.S. crude oil futures settled 0.2% higher at $102.75 a barrel.

Canadian bond yields were mixed across a flatter curve. The 2-year touched its highest since October 2008 at 2.596% before dipping to 2.581%, up 6.1 basis points on the day.

(Reporting by Fergal Smith; Editing by William Maclean and Will Dunham)