Canadian dollar clings to modest gain after hot inflation data

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Wednesday as domestic data showing an 18-year high for inflation supported the market's "hawkish outlook" for the Bank of Canada, offsetting a drop in oil prices.

Canada's annual inflation rate climbed to 4.4% in September, driven by rising transportation, shelter and food prices, data showed, putting the focus on the Bank of Canada ahead of a rate decision next week.

Analysts say the BoC could further cut its bond buying program next week, while money markets expect the first interest rate hike to come in April, which is sooner than the central bank has been guiding.

"Markets aren't much moved by the inflation print, with investors already having priced in a very hawkish outlook for the Bank of Canada prior to the release," Royce Mendes, a senior economist at CIBC Capital Markets, said in a note.

The Canadian dollar was trading 0.1% higher at 1.2345 to the greenback, or 81.00 U.S. cents, after trading in a range of 1.2336 to 1.2368. On Tuesday, it touched its highest in over three months at 1.2309.

The price of oil, one of Canada's major exports, fell after the Chinese government stepped up efforts to tame record high coal prices and ensure coal mines operate at full capacity. U.S. crude prices were down 1% at $82.14 a barrel.

Separate data showed that Canadian home prices barely rose in September from August as a recent slowdown in housing sales weighed.

Canadian government bond yields were mixed across a steeper curve, mirroring the move in U.S. Treasuries.

The 10-year rose half a basis point to 1.635% but was holding below last week's peak of 1.683%, which was its highest since January last year.

(Reporting by Fergal Smith; Editing by Sandra Maler)