By Chris Fournier and Allison Bennett March 19 (Bloomberg) -- The Canadian currency came the closest to parity with its U.S. counterpart in almost 20 months after a report showed consumer prices rose last month more than forecast, bolstering expectations for higher interest rates. The loonie, as Canada’s dollar is sometimes known, touched C$1.0062, its strongest level since July 23, 2008. The currency is the top performer today among the 16 most-traded versus the greenback as traders bet the Bank of Canada will tighten monetary policy before the Federal Reserve and commodities such as crude oil, copper and gold sustain year-to-date gains. “This will prompt the believers that there’s going to be forceful move on rate hikes sooner rather than later,” said C.J. Gavsie, managing director for foreign-exchange trading in Toronto at Bank of Montreal, referring to the inflation data. “Parity seems to still be the psychological play.” The Canadian dollar appreciated 0.5 percent to C$1.0092 at 9:28 a.m. in Toronto, from C$1.0141 yesterday, when it declined 0.4 percent. It has appreciated in 13 of the 15 trading sessions this month. One Canadian dollar buys 99.08 U.S. cents. Canada’s dollar rose to par with the greenback in September 2007 for the first time in three decades amid booming demand for raw materials. It was last at parity on July 22, 2008, and then lost 18 percent that year as the credit crisis crushed demand for commodities. Consumer prices advanced 0.4 percent in February after a 0.3 percent increase in the prior month, Statistics Canada reported today in Ottawa. The median forecast of economists in a Bloomberg News survey was for a 0.3 percent increase. ‘Additional Pressure’ Canadian retail sales rose in 0.7 percent in January, Statistics Canada said in Ottawa. Total receipts were expected to grow 0.6 percent, according to the median estimate of 16 economists in a Bloomberg survey. The Bank of Canada said on March 2 that inflation and economic output have been higher than policy makers expected, signaling rate increases in coming months. Today’s data may intensify calls for tighter monetary policy. “In this environment it means more support for the Canadian dollar and some additional pressure on the Bank of Canada,” said Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital, a unit of Canada’s third-largest bank. The yield on the December 2010 bankers’ acceptances contract jumped as much as 15 basis points to 1.63 percent, the highest since Jan. 8. Money managers and hedge funds use the contracts to bet on changes in interest rates and manage their exposure. The contracts have settled at an average of 17 basis points above the central bank’s overnight rate since Bloomberg started tracking the gap in 1992. ‘Ramping Expectations’ “This morning’s high-side surprise in the inflation numbers is ramping up rate hike expectations,” said David Love, a Montreal-based trader of interest-rate derivatives at brokerage Le Groupe Jitney Inc. Canada’s dollar will weaken to C$1.05 by the end of the year, according to the median forecast of economists and analysts surveyed by Bloomberg News. Royal Bank of Canada, the nation’s largest lender, sees it advancing through parity by the end of June before retreating to C$1.02 by year-end. Government bonds declined. The two-year note’s yield surged nine basis points, or 0.09 percentage point, to 1.65 percent. The price of the 1.5 percent security maturing in March 2012 dropped 17 cents to C$99.73. Canada’s government bonds of one- to three-year duration have made investors 0.5 percent this year, according to a Bank of America Merrill Lynch index. To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

Source