The Canadian dollar sagged on Friday to its weakest in more than a month against a rallying US dollar following North American economic data that buttressed expectations that the US Federal Reserve will hike interest rates sometime this year. Mixed Canadian data did not move the needle for investors trying to gauge the Bank of Canada's next move. Retail sales rose for a second straight month in March, climbing 0.7 percent and topping expectations for a modest gain of 0.3 percent. Volumes only increased 0.1 percent, however.
Meanwhile, inflation fell short of economists' forecasts and the Bank of Canada's 1 to 3 percent target range, cooling to 0.8 percent in April, its smallest increase since October 2013. The data reflected the central bank's expectations that soft energy prices would put a temporary damper on the economy. The US dollar rallied after data showed consumer prices moderated in April due to weak gasoline prices, but rising shelter and medical care costs gave underlying inflation pressures a boost.
Remarks by Fed Chair Janet Yellen that a rate increase was on track this year added further support. "The Bank of Canada is almost a non-player, everything is going to be driven by data and the Fed," said Rahim Madhavji, President at KnightsbridgeFX.com. "Inflation is another checkmark on the checklist for the Fed to raise rates sooner rather than later and that's why the (US) dollar is up."
The Canadian dollar ended at C$1.2301 to the greenback, or 81.29 US cents, sharply weaker than the Bank of Canada's official close of C$1.2208, or 81.91 US cents on Thursday. The loonie traded as weak as C$1.2322, its weakest since April 16, after trading as strong as C$1.2197 early in the session. A fall in crude prices also added to pressure on the loonie. US crude was down 1.3 percent to $59.92, while Brent crude lost 1.5 percent to $65.53.
Canadian government bond prices were mixed across the maturity curve, with the longer term bonds falling. The two-year bond was down 2.5 Canadian cents to yield 0.680 percent, while the benchmark 10-year fell 21 Canadian cents to yield 1.771 percent. The Canada-US two-year bond spread was 6.2 basis points, while the 10-year spread was -44.4 basis points.