Canadian dollar hits 7-week high as ‘peak’ inflation hobbles U.S. counterpart

The Canadian dollar CADUSD strengthened to its highest level in nearly seven weeks against its U.S. counterpart on Thursday as oil prices rose and investors cheered data showing that U.S. inflation pressures are subsiding.

The loonie was trading 0.4% higher at 1.3365 to the greenback, or 74.82 U.S. cents, after touching its strongest since Nov. 25 at 1.3346.

“Policy-makers will be reluctant to declare victory in the battle on inflation but market conviction that this is at least the beginning of the end of the war is likely to grow,” Shaun Osborne, chief currency strategist at Scotiabank, said in a note.

“Peak U.S. inflation means peak U.S. yields which in turns means peak USD.”

The U.S. dollar fell against a basket of major currencies and equity markets globally rose as U.S consumer prices unexpectedly fell for the first time in more than 2-1/2 years in December.

Signs that inflation is slowing could support a move by the Federal Reserve to dial back the pace of its aggressive campaign to raise interest rates, reducing the risk of a sharp economic contraction.

Canada sends about 75% of its exports to the United States, including oil, which added to recent gains. U.S. crude futures settled 1.3% higher at $78.39 a barrel.

Canada’s inflation report for December is due for release next Tuesday, which could guide expectations for further tightening by the Bank of Canada.

Money markets see a 60% chance that the central bank would hike its benchmark interest rate by 25 basis points at the upcoming policy announcement on Jan. 25.

Canadian government bond yields fell across the curve, tracking the move in U.S. Treasuries.

The 10-year touched its lowest level since Dec. 19 at 2.887% before recovering slightly to 2.895%, down 11.9 basis points on the day.

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