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.”
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.
Read more
- Barrie McKenna: Bank of Canada clears way for July rate hike
- ‘Poloz doesn’t want to be remembered as the governor who caused a housing crash’
- David Parkinson: Inflation above BoC’s two-per-cent target for third straight month
- The ‘sea change’ in Canadian mortgages is going to really hurt
- Goldman, Morgan Stanley at odds over loonie’s outlook before BoC
Markets at a glance
Read more
- Follow our Inside the Market
- Eric Reguly: Italian debt crisis places Merkel in the hot seat once again
- China slams surprise U.S. trade announcement, says ready to fight
A how-much-will-it-cost scene I’d love to see
Read more
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- Ottawa is buying Trans Mountain. What does that mean? A guide
- Jeff Lewis, Kelly Cryderman: Ottawa has ‘limited options’ among field of potential Trans Mountain buyers
- Jeffrey Jones: The real prize is cash that would flow from tariffs
- Gary Mason: Justin Trudeau’s Faustian bargain
- Justine Hunter: Trudeau goes from environmental ally to protest target
- Campbell Clark: Trudeau takes big risk with Trans Mountain deal – but it was his only decent option
- Konrad Yakabuski: Trudeau is now all-in on oil sands expansion
- Elmira Aliakbari, Ashley Stedman: Ottawa has no one to blame but itself for the Trans Mountain saga
More news
- BMO hikes dividend as quarterly earnings beat market expectations
- National Bank second-quarter profit rises from year ago, raises dividend
- U.S. first-quarter growth revised down to 2.2 per cent