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Canada dollar rises despite soft January CPI report

TORONTO: The Canadian dollar ended substantially higher on Thursday after a rising tide of buying interest and positive sentiment helped sweep aside softer-than-expected consumer price index data, market watchers said.

The Canadian dollar closed at C$1.4548 (68.74 US cents) on Thursday after closing at C$1.4612 (68.44 US cents) in the previous session.

The Canadian dollar was hovering in a tight range around C$1.4612 just before news that all-items inflation rose by 2.3 percent on a year-over-year basis considerably lower than the expected 2.8 percent increase.

Statistics Canada also reported that all-items inflation fell by 0.1 percent on a monthly basis, and that core inflation, which excludes the volatile food and energy sectors, fell 0.3 percent from the previous month, and rose 1.4 percent on a year-over-year basis.

Traders said the market was originally inclined to push the US dollar lower, but was temporarily pushed off course by the news, which took the Canadian dollar down to the C$1.4625 area.

A few big orders to sell US dollars then forced the market to pivot, and the Canadian dollar appreciated fairly rapidly as some traders abandoned US dollar long positions.

US investment banks helped instigate the Canadian dollar buying, along with some European players, one Toronto currency trader said. "I think some Swiss names were doing it, as well, he said.

Currency market speculation linked those flows to merger and acquisition activity, the trader said.

"Maybe it's just one of those things where the market was looking for Canada to continue to soften up. And as soon as the market gets focused one way, how often does it turn around and go right back in their face," the Toronto trader said.

Part of the Canadian dollar's resurgence on Thursday reflected a general US dollar weakness stemming from problems in US equity markets, market watchers said.

Other market sources reported buying of the Canadian dollar on the International Monetary Market.

The Canadian dollar was also being bought against the Australian dollar in cross trading action, the trader added.

The currency is poised to appreciate further, he said. "I think it's looking pretty good for Canada right around here, and I wouldn't be surprised if we see it (up) to C$1.4530 in relatively short order," the trader said.

Harvinder Kalirai, an economist with IDEA Global.com in New York, said Thursday's inflation news does not fundamentally alter expectations that the Bank of Canada will match the next few interest rate increases from the US Federal Reserve.

"At least in the near term, the outlook for monetary policy has not really changed that much," Kalirai said.

"And, also, there's just generally good interest by fund managers in Canadian assets," he said.

While it slumped on Thursday in sympathy with the US market, the Toronto Stock Exchange Composite 300 Index has consistently outperformed the Dow Jones Industrial Average recently, he said.

"The key is, if you've got to be invested somewhere, Canada looks like a good place for outperformance," Kalirai said.

Even today's inflation data reinforces the prospect that Canada will outperform by pointing out the balanced nature of the Canadian economy, he said.

"There's also this new perception that Canada is a tech haven now, and actually the technology capitalisation of the TSE has surpassed that of the resource sector, so in some ways, that is true, really," Kalirai said.

In cross-trading against major currencies, the Canadian dollar was at 76.47 yen and at C$1.4440 against the euro. The Canadian dollar was at A$1.1170 against the Australian dollar.-Reuters