The Canadian dollar CADUSD strengthened against its U.S. counterpart on Thursday, rebounding from its lowest level in more than two years, as equity markets reversed course after they were pressured earlier in the day by hot U.S. inflation data.
Wall Street’s main indexes rallied, brushing aside prospects of additional aggressive interest rate hikes by the Federal Reserve after data showed that U.S consumer prices increased at an annual rate of 8.2% in September and underlying inflation pressures continued to rise.
“It feels like the market has priced in the risks associated with higher inflation and is at ‘peace’ with the hawkish Fed outlook,” said Amo Sahota, director at Klarity FX in San Francisco.
“That combined with the potential of a U.K. tax reversal is giving the market something to cheer for the day.”
British Prime Minister Liz Truss is considering reversing more of her government’s controversial “mini-budget,” some media reported. Truss’s fiscal plan had contributed to recent volatility in global financial markets.
The Canadian dollar was trading 0.6% higher at 1.3725 per U.S. dollar, or 72.86 U.S. cents, after touching its weakest level since May 2020 at 1.3977.
Adding to support for the loonie, the price of oil, one of Canada’s major exports, settled 2.1% higher at $89.11 a barrel, supported by low levels of diesel inventory.
Still, the currency is down more than 7% since August.
“We think the market will be doubtful of chasing too much loonie strength, having being burnt several times since the summer,” Sahota said.
Canadian government bond yields were mixed across a more deeply inverted yield curve.
The 2-year touched its highest level since October 2007 at 4.186% before dipping to 4.102%, up 6.2 basis points on the day, while the 10-year was down 2.9 basis points at 3.395%.