Loonie strengthens to five-month high

Canada’s dollar (CME:CDU14) climbed to the strongest level since January as a gauge of inflation exceeded the central bank’s target for the first time in two years.

The currency strengthened against all of its 16 major counterparts as separate data showed Canadian retail sales rose more than forecast in April. The consumer price index gained 2.3 percent in May from a year earlier, beating forecasts. Core CPI, which excludes eight volatile products, increased 1.7 percent, from 1.4 percent the previous month.

“The Bank of Canada had communicated all along any uptick in inflation is transitory, it’s just energy and food, don’t worry about it,” said Greg Anderson, head of global exchange strategy at Bank of Montreal, by phone from New York. “Well, here it is, CPI, stripped of energy and food, and it’s surging higher. It is untenable, they’re going to have to change their forecasts massively.”

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, appreciated 0.5 percent to C$1.0760 per U.S. dollar at 9:27 a.m. in Toronto. It touched C$1.0753, the strongest since Jan. 7. One loonie buys 92.94 U.S. cents.

The Canadian dollar has gained 0.9 percent this week in its second five-day advance.

The Bank of Canada’s goal for inflation is 2 percent. Economists in a Bloomberg survey forecast today’s report would show CPI held at that level, which it reached in April for the first time since April 2012. It last exceeded 2 percent in February 2012.

Economists projected core CPI growth at 1.5 percent in May from a year earlier.

Shifted statements

The central bank kept its benchmark interest rate at 1 percent on June 4, with policy makers reiterating concern that low inflation and weak exports are hindering the nation’s economy. Governor Stephen Poloz said “the downside risks to the inflation outlook” remain, even after data two weeks earlier showed consumer prices rose at 2 percent.

Since taking over at the Bank of Canada last June, Poloz shifted policy statements from cautioning about the need for interest-rate increases to a neutral view that leaves open the possibility of a cut, increasing pressure on the nation’s dollar. Poloz’s references to the importance of a weaker currency to support exports and persistent warnings about the threat of low inflation have kept up the pressure.

“The Bank of Canada will replace talking about uncomfortably low inflation with instead talking about uncomfortably weak recovery of the export sector,” Bank of Montreal’s Anderson said. “That’s the only way they can take a little more hawkish stance on rates without having the currency appreciate.”

Canadian retail sales increased 1.1 percent to C$41.6 billion ($38.5 billion), Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast a 0.6 percent increase, based on the median of 19 projections, and the gain exceeded the 1 percent highest forecast.

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