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Loonie surges as Bank of Canada hints at future hike

Canadian dollars (loonies) fall through the air in a photo illustration in Vancouver, B.C. Thursday, Sept. 22, 2011.


The Canadian dollar shot up more than a U.S. cent Tuesday morning after the Bank of Canada said economies around the world and in Canada are doing better than it previously thought.

The central bank kept its key interest rate unchanged at one per cent but hinted that higher rates could be on the way.

The loonie was up 1.16 of a cent at 101.19 cents (U.S.) at mid-morning.

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CIBC World Markets chief economist Avery Shenfeld said the wording of the central bank's announcement suggested it seems to be thinking about a small string of rate hikes at some point late this year."

The Bank of Canada said that "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate."

The central bank observed that economic momentum in Canada is slightly firmer than the it had expected in January. It now expects that the economy will grow by 2.4 per cent in both 2012 and 2013 before moderating to 2.2 per cent in 2014 and added that higher energy costs are expected to contribute to higher inflation.

Mr. Shenfeld added that "we see the Bank's growth forecast as a bit optimistic for 2012, and doubt that growth will be firm enough to justify the rate hikes that the bank now sees itself delivering."

Also on the economics front, Statistics Canada reported that manufacturing sales dropped 0.3 per cent in February, in line with market expectations. The showing followed a downwardly revised 1.3 per cent decline in January.

February's drop was led by an 8.7 per cent drop in the motor vehicle component.

Elsewhere, there was relief on markets after Spain sold €3.2-billion of short term debt amid strong demand but at much higher interest rates than just three weeks ago.

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The Treasury paid a yield of 2.6 per cent on selling €2.1-billion in 12-month notes compared to 1.4 per cent in the last such auction March 20. It paid 3.1 per cent to sell €1.1-billion in 18-month-bills, up from 1.7 per cent.

Yields on Spanish bonds have been rising recently amid market skepticism that the country can manage its huge debts while enduring a second recession in three years this quarter.

Yields for 10-year bonds on the secondary market broached the six per cent mark Monday.

The Spanish Treasury faces a big test Thursday when it looks to offload up to €2.5-billion in debt maturing in 2014 and benchmark 10-year bonds.

Higher commodity prices also supported the loonie.

Crude prices advanced with the May contract on the New York Mercantile Exchange ahead $1.73 cents to $104.66 (U.S.) a barrel.

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Copper prices were ahead two cents at $3.65 (U.S.) a pound while bullion dipped $3.20 to $1,646.50 an ounce.

Positive data from the continent's biggest economy also improved sentiment on financial markets.

Germany's ZEW survey of investor optimism unexpectedly rose in April for a fifth straight month, rising to 23.4 from 22.3 in March. Analysts had expected a dip to 19.0, with some predicting a figure as low as 15.0.

The upbeat views run counter to the recent concern about bond market pressure on Spain and Italy, and were gathered from 275 financial experts between April 2 and April 16, during which the interest rate on those countries' bonds rose in a sign of financial distress.

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