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morning business briefing

Briefing highlights

  • Canadian dollar bolts higher
  • Bank of Canada signals rate hike
  • Markets at a glance
  • A how-much-will-it-cost scene I’d love to see
  • BMO, National Bank raise dividends
  • U.S. first-quarter growth revised down slightly
  • What to watch for today

Loonie bolts higher

The Canadian dollar is bolting higher after a central bank signal that interest rates will soon rise again.

It’s far from a rebirth for the wounded currency, but the loonie still jumped sharply after the Bank of Canada statement, having sat below 77 US cents earlier in the day.

As The Globe and Mail’s Barrie McKenna reports, central bank governor Stephen Poloz, senior deputy Carolyn Wilkins and their colleagues held their benchmark overnight rate at 1.25 per cent.

But they also said that “higher interest rates will be warranted to inflation near target.” Notable, too, is that they dropped their previous reference to being cautious over future moves.

“Governor Poloz didn’t pull the trigger today, but the central bank did hint that the time could be nigh for another rate hike in Canada,” said Royce Mendes of CIBC World Markets.

“In removing the word ‘cautious’ from the sentence regarding future rate hikes it does appear the central bank is slightly more comfortable tightening policy in the months ahead.”

Open this photo in gallery:

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen PolozPATRICK DOYLE/The Canadian Press

Economists now believe we could see a rate increase in July, which makes the loonie more attractive.

“For USDCAD, the primary takeaway is the bank has cemented the potential for a July rate hike,” said Mark McCormick, North American head of foreign exchange strategy at TD Securities, referring to the U.S. versus the Canadian dollar by their symbols.

“Market pricing has eased a touch on the hopes for July but the tone of the statement argues that July is likely a done deal,” he added.

“This is likely to offer the market some room to push USDCAD lower but the bank’s outlook for the next year still looks too aggressive to us. USDCAD has priced in a decent risk premium, leaving the market to consolidate a touch over the coming sessions.

In this case, pushing USDCAD lower means, of course, driving the loonie higher.

The central bank still cited uncertainty over trade, citing, too, the slump in the housing market amid provincial measures and new mortgage-qualification rules meant to cool things down.

Economic growth appears stronger than expected and “inflation in Canada has been close to the 2-per-cent target and will likely be a bit higher in the near than forecast in April, largely because of recent increases in gasoline prices.”

Bipan Rai, CIBC’s North America head of foreign exchange strategy, described today’s signal as about as strong as you can get.

“Some of the flags raised before in terms of capital investment have been eased to a degree here and the drop of the word ‘cautious’ implies that growth is stronger than originally envisaged,” Mr. Rai said.

“As for the CAD, the market was moving towards a dovish statement in the week before but that was largely driven by macro factors as opposed to Canada-specific,” he added, saying the range for the loonie is now between about 77 and 80 US cents.

“And outside of political headlines, there’s no reason to deviate.”

A 5000-year history of interest rates

20%

Short-term rates

Long-term rates

18

16

14

12

10

8

6

4

2

0

3000

BC

300

CE

1755

1825

1895

1965

2035

1720

1790

1860

1930

2000

THE GLOBE AND MAIL, SOURCE: BANK OF AMERICA

A 5000-year history of interest rates

20%

Short-term rates

Long-term rates

18

16

14

12

10

8

6

4

2

0

3000

BC

300

CE

1720

1755

1790

1825

1860

1895

1930

1965

2000

2035

THE GLOBE AND MAIL, SOURCE: BANK OF AMERICA

A 5000-year history of interest rates

20%

Short-term rates

Long-term rates

18

16

14

12

10

8

6

4

2

0

3000 BC

300 CE

1720

1755

1790

1825

1860

1895

1930

1965

2000

2035

THE GLOBE AND MAIL, SOURCE: BANK OF AMERICA

For the record, according to Bank of America Merrill Lynch, global interest rates are coming off the 5,000-year lows of a couple of years ago.

This chart takes you through everything from the Babylonian and Roman empires to Byzantium and early Bank of England times and, finally, to the yield on the 10-year U.S. Treasury.

“The current economic cycle suggests the destination of interest rates will be lower than in the past, but there is no doubt policy makers are pulling out all the stops to create what bond investors like the least … inflation,” Merrill Lynch investment strategists Michael Hartnett, Jared Woodard and Tommy Ricketts said in the report that contained that chart.

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Markets at a glance

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A how-much-will-it-cost scene I’d love to see

Open this photo in gallery:

Finance Minister Bill MorneauSean Kilpatrick/The Canadian Press

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