Canadian dollar stabilizes near 6-week high as inflation eases

TORONTO, Aug 20 (Reuters) – The Canadian dollar gave up earlier gains against the U.S. dollar on Tuesday as oil prices fell and domestic inflation data supported expectations that the Bank of Canada would cut interest rates further next month.

The loonie traded almost unchanged at 1.3630 to the US dollar, or 73.37 US cents, after hitting its highest intraday level since July 11 at 1.3606.

Canada's annual inflation rate cooled to a 40-month low of 2.5% in July, in line with forecasts, and core inflation indicators were eased.

“Today's consumer price index (CPI) should be enough to allay concerns about continued inflationary pressures in Canada after two minor surprises to the upside in May and June,” said Claire Fan, economist at Royal Bank of Canada, in a note.

“The hurdle for further BoC rate cuts this year is low and we continue to expect a further 25 basis point cut to be possible at its next meeting in September.”
The BoC has cut its key interest rate twice since June by 25 basis points to 4.50 percent.

The swap market is already expecting a further rate cut at the next monetary policy decision on September 4 and expects an additional easing of 76 basis points by the end of 2024, instead of the estimated 72 basis points before the inflation data was released.

The price of oil, one of Canada's main exports, fell to a nearly two-week low as supply concerns in the Middle East eased and economic weakness in China weighed on fuel demand.

U.S. crude oil futures fell 0.6% to $73.94 a barrel, while the U.S. dollar (.DXY) lost ground against a basket of major currencies ahead of revisions to U.S. jobs data on Wednesday.

Canadian government bond yields declined across the curve, with the 10-year bond losing 5.7 basis points to 3.009%.

Reporting by Fergal Smith; Editing by Richard Chang