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Canadian dollar rises but gains capped ahead of U.S. CPI data

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The Canadian dollar strengthened against its U.S. counterpart on Wednesday, but stayed within its recent range as the Bank of Canada reiterated that interest rate hikes are coming and investors turned attention to a U.S. inflation report.

The loonie strengthened 0.3% to 1.2670 per greenback, or 78.93 U.S. cents, after trading in a range of 1.2666 to 1.2715.

“The CAD seems to be stuck in a range here,” said Shaun Osborne, chief currency strategist at Scotiabank. “We seem to be looking at a fairly solid wall of U.S. dollar buying around 1.2650, 1.2660”

Investors are awaiting U.S. consumer prices data on Thursday for new clues on the Federal Reserve’s plans to hike interest rates.

“We will see what U.S. CPI will bring tomorrow … That seems to be what the markets are waiting for this week to maybe drive a bit more volatility,” Osborne said.

Bank of Canada Governor Tiff Macklem said that interest rates would need to rise to combat “too high” inflation, repeating the message from last month’s policy announcement, and that the economy needs more investment to build up supply capacity to meet strong consumer demand.

A move by the BoC to shrink the size of its balance sheet, so-called quantitative tightening, could follow shortly after the first interest rate hike, analysts say.

Money markets expect the central bank to hike next month for the first time since October 2018.

U.S. crude prices settled 0.3% higher at $89.66 a barrel as data showed a drop in U.S. inventories. Oil is one of Canada’s major exports.

Meanwhile, Canadian federal ministers urged protesters blocking two border crossings with the United States to return home before more damage is done to the economy. The demonstration opposes mandates and other restrictions in the COVID-19 pandemic.

The Canadian 10-year yield eased 1.4 basis points to 1.843%, tracking the move in U.S. Treasuries.

 

(Reporting by Fergal Smith; Editing by Andrea Ricci and Grant McCool)

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