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Loonie Clambers Higher After Fierce Feb Inflation Data

Don Curren March 23, 2018

The Canadian dollar shook off some of its recent decline Friday and clambered higher after an unexpectedly robust inflation print had traders recalibrating their expectations for another rate increase from the Bank of Canada.

The loonie surged about 0.5% against its US counterpart after the release of Consumer Price Index data for February, extending gains made on Thursday. The greenback has been under broad selling pressure all week, a phenomenon which persisted Friday.

Statistics Canada said the Consumer Price Index (CPI) rose 2.2% on a year-over-year basis in February, following a 1.7% increase in January. The year-over-year rise exceeded expectations for a 1.9% increase.

Energy costs were 5.3% higher compared with last February 2017 after increasing 2.4% year over year in January. Year-over-year gains in gasoline (+12.6%) and natural gas (+0.8%) were larger in February than in January.

Prices for durable goods were up 0.6%, led by the purchase of passenger vehicles index. It was up 2.5%, mainly due to lower rebates on 2018 model-year vehicles.

StatsCan said higher prices for services also contributed to the increase in the CPI. In February, consumers paid more on a year-over-year basis for travel tours (+2.2%) and Internet access services (+5.2%).

The mortgage interest cost index rose 2.3%, reflecting, in part, recent interest rate increases, the statistics agency said.

In contrast to the robust inflation data, retail sales for January fell short of expectations. Retail sales increased 0.3% in January to $49.9 billion against an expected 1.1% increase.

The Bank of Canada left its overnight target rate at 1.25% earlier this month after hiking it twice in 2017 and at its January policy date.

Expectations for further rate increase has softened of late, particularly after a speech from Bank of Canada Governor Stephen Poloz last week indicated the economy appeared to have potential for more growth without stoking inflationary pressures.

February’s formidable inflation performance will likely have market participants again speculating that further monetary tightening may come relatively soon.

Bottom Line: Unequivocally strong inflation data for March prompted sharp gains by the Canadian dollar. How sustained they will be in at environment replete with unpredictable factors remains to be seen.