By Fergal Smith
TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, adding to this week's gains after bets that the Bank of Canada would cut interest rates over the coming months were tempered by data showing a pick-up in underlying inflation.
Canada's annual inflation rate rose 2.2% as expected in November on the back of higher energy prices, while the average of the Bank of Canada's three measures of core inflation rose to 2.2% from 2.1%, data from Statistics Canada showed.
"It does make for a more challenging environment to follow some of the other central banks in easing," said Robert Both, a macro strategist at TD Securities.
The Bank of Canada has left its policy rate unchanged at 1.75% this year despite easing by the Federal Reserve and the European Central Bank. Chances of an interest rate cut by July next year fell to 13% from 20% before the data, the overnight index swaps market indicated.
At 9:04 a.m. (1404 GMT), the Canadian dollar was trading 0.2% higher at 1.3127 to the greenback, or 76.18 U.S. cents. The currency, which notched on Monday a near seven-week high at 1.3115, traded in a range of 1.3128 to 1.3174.
For the week, the loonie was up 0.3%, helped by a trade deal between the United States and China.
Canada is a major exporter of commodities, including oil, so its economy could benefit from an improved outlook for global trade.
U.S. crude oil futures (CLc1) were down 0.4% at $60.68 a barrel after U.S. industry data showed a surprise buildup in crude inventories but losses were kept in check by expectations for an uptick in demand next year on the back of progress in resolving the U.S.-China trade row.
Canadian government bond prices were lower across a steeper yield curve, with the two-year (CA2YT=RR) down 2 Canadian cents to yield 1.715% and the 10-year (CA10YT=RR) falling 24 Canadian cents to yield 1.661%.
The gap between Canada's 10-year yield and its U.S. equivalent narrowed by 3 basis points to a spread of 22.5 basis points in favor of the U.S. bond.