Canadian dollar surges on prospect of rate hike

A sharp increase in the pace of consumer prices in Canada more than reversed Monday’s difficult session for the so-called loonie as money-market traders firmly put an interest rate increase back on the Bank of Canada’s to-do list. The U.S. dollar index fell as investors set off for work on Tuesday in better spirits after a meltdown for stocks earlier over fears that Greece would need to restructure its debt in a move that would contradict its official line.

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Canadian dollar – Data for March showed the largest increase in the annual pace of consumer prices since September 2008 and sent the local dollar sharply higher as dealers signaled a greater likelihood of tighter monetary policy later in the year. The Canadian dollar slid on Monday as risk aversion drove down commodity prices and reached $1.0275. Today the surge in inflation put the glove on the other hand forcing buyers to cover shorts driving the loonie as high as $1.0450. The 1.1% jump in monthly prices in March was almost twice that expected and forced the annual pace of change to 3.3%. The Bank of Canada’s core CPI reading jumped by 0.5% to 1.7%. The government said that all components rose in March while, with the exception of alcohol and tobacco, all prices rose faster than in February. Food prices rose by 3.3% caused in part by adverse weather in Southern U.S. states and Mexico. Fresh fruit and vegetables rose in cost by 18.6% while meat prices added 5%. More worrisome was the trend towards rising consumer costs outside of a 12.8% increase in energy costs. Aside from rising gasoline prices the report showed that vehicle insurance premiums rose as did the cost of air transport and passenger vehicles, despite a dip seen in February.

Euro – Things are somewhat more settled across the Eurozone on Tuesday after Greece attracted more than three bond buyers for each of the €1.625 billion three-month bills it issued at auction. The euro rallied to $1.4317 against the dollar and added 0.4% against the yen to ¥118.15. Greek two-year yields on Monday jumped to a record by breaching 20% as investors ditched government bonds for fear that bond holders would be hurt in the event that Greece was forced to sit down and renegotiate repayment terms. Advance readings for Eurozone PMIs painted a mixed picture for activity across the 17-nation region. The manufacturing PMI reading rose by more than expected to 57.7 while PMI services dipped to 56.9. The overall composite reading was therefore greater than forecast increasing to 57.8. German manufacturing activity expanded while its service activity declined sharply. The euro could easily have continued its decline on today’s arguably mixed data especially in light of a dip in the consumer confidence reading to -11.4 for April.

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