The Canadian dollar weakened against the greenback on Friday as an uncertain outlook for the NAFTA trade pact and weaker-than-expected domestic inflation data clipped expectations for a Bank of Canada interest rate hike as early as this month.
Mexico’s Economy Minister Ildefonso Guajardo said that U.S. Trade Representative Robert Lighthizer was right that many issues must still be resolved in current trade negotiations to revamp the North American Free Trade Agreement, but added they were not technically complicated.
“NAFTA still remains a wildcard,” said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets. “The Bank of Canada can’t afford to step in front of that decision unless there is compelling data to do so.”
Canada’s annual inflation rate cooled modestly to 2.2 percent in April, short of economist expectations for 2.3 percent, data from Statistics Canada showed.
Still, two out of three of the central bank’s core inflation measures rose and separate data showed that Canadian retail sales rose by the most in five months.
It fits with the Bank of Canada’s view that it is going to have to raise interest rates further but “inflation isn’t really pushing them to do it in a really fast way that would destabilize the household sector,” said Nathan Janzen, senior economist at Royal Bank of Canada.
The central bank has raised its benchmark interest rate three times since July to leave it at 1.25 percent. Chances of another hike at the May 30 announcement sank to 33 percent from nearly 50 percent before the data.
At 4 p.m. EDT (2000 GMT), the Canadian dollar was trading 0.5 percent lower at $1.2879 to the greenback, or 77.65 U.S. cents.
The currency touched its weakest since Tuesday at $1.2911. For the week, the loonie fell 0.7 percent.
Declines for the loonie came as the U.S. dollar rose to a five-month peak against a basket of currencies and the price of oil fell.
Speculators have cut bearish bets on the Canadian dollar for the second straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of May 15, net short positions had dipped to 23,656 contracts from 23,861 a week earlier.
Canadian government bond prices were higher across the yield curve, with the 10-year rising 29 Canadian cents to yield 2.486 percent. Canada’s bond and stock markets will be closed on Monday for the Victoria Day holiday.