The Canadian dollar edged slightly higher against the US currency on Friday, breaking four days of losses, as higher than expected domestic inflation data curbed market bets for an interest rate cut. The consumer price index rose 2.9 percent in October from a year earlier, easing from 3.2 percent in September, as gasoline prices rose at a slower year-on-year pace.
The core inflation rate, closely watched by the Bank of Canada because it excludes some volatile items, eased to 2.1 percent from 2.2 percent in the previous month. Markets had forecast, on average, slightly lower rates for total CPI and core CPI of 2.8 percent and 1.9 percent, respectively. "Above expected core CPI numbers maybe make the Bank (of Canada) on the margin - very much on the margin - a little bit less comfortable, potentially, lowering rates," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.
"Either way, you'd need some sort of blow-up in Europe, something significantly negative, for them to move on that front." Higher interest rates tend to support a country's currency by attracting capital flows. After the data, the Canadian dollar touched a high of C$1.0200 against the greenback, or 98.04 US cents, before retreating to end the session at C$1.0272, or 97.35 US cents. That was up from Thursday's session close at C$1.0283 versus the greenback or 97.25 US cents, but down 1.5 percent on the week.
Analysts surveyed by Reuters expect the next Bank of Canada interest rate move to be an increase, sometime in mid- to late 2012 or early 2013. Markets have been pricing in a rate cut for some time. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders scaled back bets on a rate cut for this year or next after the inflation data.
Still, in the short term, market watchers expect moves by the currency to be hinged largely on events outside of Canada. "CPI is not the driving factor for the Canadian dollar, it's not the driving factor for the market, it's not the driving factor for Bank of Canada policy. We're more focused on Europe and the broader picture, and the Canadian dollar is as well," Reitzes said.
The euro gained on Friday on hopes the European Central Bank may get involved in a plan to help struggling euro zone countries, but world stocks fell as many investors continued to fear a spread of the region's debt crisis into core European economies. David Bradley, director of foreign exchange trading at Scotia Capital, said technical levels to watch for next week included Canadian dollar support of C$1.0070-75 against the US dollar, while a key resistance level would be C$1.0310.