Loonie bounces after rout as inflation rate rises

(QMI Agency photo)

(QMI Agency photo)

Leah Schnurr, REUTERS

, Last Updated: 4:47 PM ET

TORONTO - The Canadian dollar firmed against the greenback on Friday, bouncing from a 4-1/2-year low in the previous session as the loonie benefited from the global flight from risky assets and as the domestic inflation rate rose.

The stabilization in the loonie, which has been one of the underperformers among major currencies in 2014, came as investors sold stocks and emerging market currencies in the midst of a mix of country-specific problems and worries that reduced bond-buying from the U.S. Federal Reserve reduces the liquidity that has boosted emerging market assets.

"People are worried about contagion. It's not a huge issue at the moment, it's like a small crack in the window," said Rahim Madhavji, president at Knightsbridge FX.com in Toronto.

"Canada does have a triple-A status, and that is something that is going to support the loonie, all else being equal."

The loonie also got some relief from data that showed the inflation rate was 1.2% on an annualized basis last month, slightly lower than the 1.3% analysts had predicted but up from 0.9% in November.

The inflation report garnered more attention from markets than usual after the Bank of Canada earlier in the week said it was more worried about persistently low inflation than it was three months ago.

"It's slightly below what the consensus number was, but despite that, it wasn't anything worse, which would have really hurt the loonie," said Madhavji.

Core inflation, which strips out volatile items and is closely watched by the Bank of Canada, edged up to an annualized 1.3% as expected from 1.1% in November.

The Canadian dollar ended the North American session at $1.1073 to the greenback, or 90.31 cents US, stronger than Thursday's close of $1.1099, or 90.10 cents US. The Canadian dollar tumbled to its lowest level since July 2009 on Thursday in the wake of dovish comments from the Bank of Canada earlier in the week. Expectations the central bank could become more accommodative have weighed heavily on the currency of late, with the greenback appreciating by more than 4% against the loonie in the first three weeks of the year.

As well as flagging the weak inflation environment, the Bank of Canada on Wednesday noted the stimulative impact on exports from the Canadian dollar's recent depreciation, though the central bank also said the currency was still strong and that its strength still posed an obstacle to exports.

Some of Friday's snap-back could be due to some profit-taking and investors covering their short positions in the Canadian dollar, said Shaun Osborne, chief currency strategist at TD Securities in Toronto. Still, he doesn't think the trend of the weaker loonie is over yet.

"We may settle into something of a range until we determine the next move, but with the Bank leaning dovishly and Governor Poloz making it very, very, very clear to markets that he's not unhappy with the weakness in the Canadian dollar, I still rather think we've got a ways to go on this journey yet before we see the Canadian dollar stabilize."

Canadian government bond prices were mixed, with the two-year off half a cent to yield 0.971%. The benchmark 10-year was up 3 cents to yield 2.401%.