The Canadian dollar rallied against its US counterpart on Friday, extending gains following the Bank of Canada's steady rate decision mid-week, as crude oil prices rose and retail sales data suggested the economy was stronger than expected. Oil rose as a cold snap boosted demand for heating oil across the United States and Europe.
Global equity and commodity markets had been hit hard so far in 2016 on heightened fears about slower global growth, but have recovered on rising expectations of monetary easing by central banks in Europe and Japan. "The market is beginning to get a better handle on the risk," said Adam Button, currency analyst at ForexLive in Montreal. "The first three weeks of the year, everyone was panicking about everything."
"It got a little bit overdone and the snapback rally has been tremendous." The Canadian dollar ending the session trading at C$1.4150 to the greenback, or 70.67 US cents, much stronger than the Bank of Canada's official close of C$1.4279, or 70.03 US cents. The currency touched its strongest level since January 11 at C$1.4139, while its weakest level of the session was C$1.4300.
It touched C$1.4689, or 68.08 US cents at one point on Wednesday, its weakest since 2003. The market has reduced expectations for Bank of Canada rate cuts after the central bank decided on Wednesday to leave its policy rate at 0.50 percent, putting the onus on federal authorities to raise spending.
"The Bank of Canada has signalled they have a higher threshold for acting soon and they have punted the ball to the federal government," said Derek Holt, an economist at Scotiabank. Canadian retail sales jumped 1.7 percent in November, far more than expected, due to higher sales at new car dealers and Black Friday purchases, data from Statistics Canada showed.
On the other hand, Canada's annual inflation rate edged up less than expected to 1.6 percent from 1.4 percent in November, Statistics Canada said. The core inflation rate continued to edge downward, falling to 1.9 percent from 2.0 percent the previous month. Canadian government bond prices were mostly lower across the maturity curve, although the two-year price was up half a Canadian cent to yield 0.454 percent. The benchmark 10-year fell 45 Canadian cents to yield 1.318 percent. The Canada-US two-year bond spread was 4.4 basis points more negative at -41.9 basis points as Treasuries underperformed at the front of the curve.