Canadian Dollar Hits Near Four-Week Low as Hot US Inflation Lifts the Dollar

Updated 10:44 UTC: The euro fell 0.7 percent to 1.1143 against the US dollar in the Orbit Post market wire snapshot for the day, down from 1.1222. Reuters reported the US dollar index 0.2 percent higher at 102.4 on Wednesday, close to a high not seen in about two weeks, with the euro at 1.114 dollars after a fall of more than 0.5 percent on Tuesday. German inflation slowed to 2.8 percent in October, confirming a preliminary reading, Reuters reported. FXStreet reported that the final German harmonized inflation figures matched the early estimates, with prices down 0.1 percent on the month and up 2.8 percent on the year. FXStreet also reported that Philadelphia Fed President Anna Paulson called for further gradual tightening, while Dallas Fed President Lorie Logan said the Fed needs at least two more quarter point increases. Traders have fully priced in a 25 basis point Fed rate hike in December, according to the CME FedWatch tool cited by Reuters.

The euro feels the same dollar move

The euro and the Canadian dollar fell for the same reason. Hot US inflation pushed traders toward the US dollar and toward a higher path for US interest rates. Reuters reported that Goldman Sachs now expects Fed hikes in December and March, while Deutsche Bank expects hikes in December, January and March. A wider rate gap pays holders of US assets more, and that keeps pressure on both currencies until the December decisions land.

The US dollar rose to 1.4218 Canadian dollars on Wednesday, up 0.7 percent from 1.4119 in the Orbit Post market wire snapshot for the day. The move extended a slide that took the Canadian dollar to a near four week low on Tuesday. Reuters reported the loonie trading 0.5 percent lower at 1.4185 per US dollar on Tuesday, after it touched 1.4210, its weakest intraday level since October 15.

Hot US inflation lifted the dollar

US consumer prices rose 0.4 percent in October from September, ahead of the 0.3 percent forecast, FXStreet reported. Core prices, which strip out food and energy, rose 0.3 percent and also beat the 0.2 percent estimate. The gain slowed from 0.6 percent in September, but still lifted the US dollar against a basket of major currencies, Reuters reported.

Rate bets now split the two central banks

Investors have fully priced in a Federal Reserve rate hike in December, Reuters reported, while swap market data put the chance of a Bank of Canada move next month at less than 50 percent. The CME FedWatch tool put the chance of a Fed hike at about 91 percent, FXStreet reported. TD Securities told FXStreet that the strong upside surprise in US inflation makes a December Fed hike all but certain, and that the debate has shifted to the size of the move, 25 or 50 basis points.

Canada's two year yield rose 9.4 basis points to 3.251 percent on Tuesday, Reuters reported, but it still fell further below the matching US yield. The gap reached about 149 basis points, the widest since October 21. US assets pay more than Canadian assets at that gap, and that supports the US dollar.

Oil and the Bank of Canada minutes added pressure

Investors also weighed minutes from the Bank of Canada decision on October 28, when the bank raised its rate. The minutes showed governors agreed that uncertainty over the path ahead did not mean the bank would do nothing, Reuters reported. A BMO Capital Markets economist told Reuters that recent data and energy prices suggest the bank is in no hurry to move again in December.

Oil fell to a two month low on Tuesday. US crude futures traded nearly 1 percent lower at 86.02 dollars a barrel after US officials downplayed the need for more military action against Iran, which eased fears of a supply disruption, Reuters reported. Oil is one of Canada's main exports, so a lower price weighs on the Canadian dollar.

Why it matters and what comes next

A weaker Canadian dollar raises the cost of US goods, travel and imports for Canadian households and firms. It helps Canadian exporters who sell in US dollars and bring those earnings home. Traders will now watch the December decisions at both central banks and whether oil recovers. The next US and Canadian price reports will test whether the rate gap keeps widening.