C$ firms modestly as inflation rate picks up

TORONTO: The Canadian dollar firmed modestly against the greenback on Friday after data showed the domestic annual inflation rate picked up as expected in April, though the currency traded in a small range.

So far in May, the Canadian dollar has largely moved sideways as analysts weigh generally improving economic data against the Bank of Canada's neutral policy stance. The central bank shifted away from its hawkish bias last October, an action that has pressured the loonie.

The Bank of Canada has expressed concern about low inflation, but Friday's data showed the annual rate rose in April to the central bank's 2 percent target for the first time in two years.

While the data was positive for the Canadian dollar, a substantially stronger currency would likely be met with pushback from the Bank of Canada, said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. The central bank is hoping to see the export sector pick up.

"So all in all, we're likely to see the Canadian dollar trade in a fairly tight range," said Sutton. "I think we're either side of C$1.10. We're sitting a little bit stronger than that right now, but I think we'll be either side of C$1.10 for the next couple of months."

The Canadian dollar was at C$1.0881 to one US dollar, or 91.90 US cents, stronger than Thursday's close of C$1.0893, or 91.80 US cents.

In the long run, a firmer inflation picture could give the loonie some modest support if it prompts the Bank of Canada to alter its stance, said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada in Toronto.

"They have certainly a dovish (tone) to their neutral bias; that has to change to something more fundamentally neutral," said Chandler.

"In the end, that could lend some marginal support to the Canadian dollar for domestic reasons, but I still think the biggest driver for the Canadian dollar will continue to be what's going on outside our borders, if the US dollar remains strong."

Canadian government bond prices were higher across the maturity curve, with the two-year up 1 Canadian cent to yield 1.052 percent and the benchmark 10-year up 12 Canadian cents to yield 2.314 percent.