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Canadian Dollar Weakens as Inflation Slowdown Cools Rate Hike Bets
The Canadian dollar weakened against its U.S. counterpart on Monday after new data revealed a significant slowdown in inflation for June, prompting traders to pare back bets on further interest rate hikes from the Bank of Canada.
The loonie traded 0.3% lower at 1.4060 per U.S. dollar, or 71.12 U.S. cents. The move represented a retreat from its strongest intraday level since June 17, which was 1.4001.
Inflation Data Cools
The currency's decline followed a report showing Canada’s annual inflation rate fell to 2.8% in June, a notable drop from the 29-month high of 3.2% recorded in May. According to the data, a sharp decline in gasoline costs was a primary driver of the deceleration.
Importantly for the central bank's outlook, core inflation measures, which the Bank of Canada monitors closely to gauge underlying price pressures, also declined.
AdMarket Impact and Outlook
The softer inflation print had an immediate impact on market expectations for the Bank of Canada's monetary policy. According to data from the swap market, the implied probability of another central bank rate hike by December fell to 66%, down from 72% before the report's release.
Adding to the pressure on the commodity-linked currency, the price of oil, a key Canadian export, also declined. Oil futures traded 0.4% lower at $82.16 a barrel.
Sentiment among speculators was already turning negative on the Canadian dollar ahead of the data. Figures released Friday by the U.S. Commodity Futures Trading Commission showed that non-commercial traders had increased their net short positions on the currency to 176,279 contracts as of July 14, the highest level since January.
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