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Could an interest rate hike drive Canadian dollar close to $1.10?

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Where's the dollar headed? Just the promise of higher interest rates sent the Canadian dollar surging, so imagine what an actual rate hike could do.

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The loonie is sharply higher since the Bank of Canada signalled in its statement yesterday that it's poised to hike its benchmark overnight rate beyond 1 per cent, possibly in the fall, rather than next year. That's obviously a concern for the country's exporters, and the central bank itself, which has cited the strong loonie as one of the threats to the economy.

So that's something of a Catch 22.

"Pull the trigger on actual hikes, and an overvalued currency risks marching in the direction toward a dime north of parity and further overshooting (note that [Canadian dollar] strengthening of late has occurred despite soft energy prices)," said Scotia Capital economists Derek Holt and Karen Cordes Woods.

What got everyone hopping yesterday was the omission of the word "eventually" from the Bank of Canada's statement as it left its key rate on hold. At its previous rate setting, the central bank had said that stimulus would have to be withdrawn eventually. Yesterday, it said simply that it will be withdrawn, though it didn't say when and it promised to be careful.

Carl Weinberg, the chief economist at High Frequency Economics, isn't so sure the market interpreted it correctly: "We can only guess whether the single word was changed with intent, and we can - without any inside knowledge of the drafting process - just as plausibly suggest that the change in text was introduced editorially rather than to send a message. Central bank messages about policy changes usually are sent with more than a single word, to ensure that they are loud and clear. We are not going to change our outlook for BoC policy on the basis of a single word change."

I believe the Bank of Canada knew exactly what it was doing, but I thought Mr. Weinberg's comments were worth sharing.

Later this morning, the Bank of Canada releases its Monetary Policy Report, and Governor Mark Carney meets with reporters, so he'll have an opportunity to expand on his thoughts. Globe and Mail economics writer Jeremy Torobin will report on the central bank's latest when the document is released at 10:30 a.m.

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"Today's release of the MPR (10:30 a.m. EST), followed by Governor Carney's press conference (11:15 a.m. EST) will provide the bank an opportunity to correct any misinterpretations from the statement," said Scotia Capital's chief currency strategist, Camilla Sutton.

"However, we expect that the BoC fully intended to signal that there are valid reasons to shift to a more hawkish stance with interest rate policy in Canada. This, combined with ongoing Asian growth, strong commodity prices and investors' desire to diversify away from [the U.S. dollar] and [the euro] should drive a stronger [Canadian dollar].

China to rescue OPTI China is moving deeper into Canada's oil sands with a deal for ailing OPTI Canada Inc., The Globe and Mail's Carrie Tait reports today from Calgary.

China National Offshore Oil Corp., or CNOOC, is paying $2.1-billion for the energy company, which filed last week for court protection from credits. Most of the cash will end up with OPTI's creditors, while stockholders get about 12 cents a share under the deal announced today.

The proposal not only rescues OPTI, but gives Nexen Inc. a wealthy partner for the Long Lake oil sands project – a major, but troubled, effort.

Merkel, Sarkozy meet German Chancellor Angela Merkel is meeting today with her French counterpart Nicolas Sarkozy in advance of an emergency summit of EU leaders in Brussels tomorrow.

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There are strong divisions in the euro zone as policy makers seek a solution to ease the debt crisis that has dogged the 17-member monetary union for more than a year. In particular, Ms. Merkel wants private creditors to share in the pain of another bailout for Greece, but the European Central Bank is opposed to anything that would lead to Greek bonds being declared in default.

An aide to Ms. Merkel said today that "we are very confident that there will be a good and sensible solution" coming out of tomorrow's summit, according to Reuters, but observers are skeptical. After all, Europe's leaders have so far acted like a dysfunctional family, and have been unable to find a solution. And only yesterday, Ms. Merkel said she didn't expect a radical solution to be reached in Brussels.

Prospects for marked progress tomorrow are "slim," said CMC Markets analyst Michael Hewson, given that "Merkel played down hopes of a quick solution, with the IMF weighing in with a dire warning about the costs to the world economy of a failure to obtain a solution this week."

China pushes U.S. The prospect of movement on the U.S. budget discussion has buoyed hopes today, though the pressure's still on as policy makers sramble ahead of the Aug. 2 deadline to raise the debt ceiling.

China again today added its voice, pushing the Americans to settle the issue.

"We hope the U.S. government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors," Beijing's State Administration of Foreign Exchange said on its website.

As The Globe and Mail's Kevin Carmichael reports from Washington, President Barack Obama yesterday endorsed a bipartisan plan to ease America's debt burden.

"While this is surely grounds for optimism and has gained tacit support from some Republicans, it would appear that Speaker of the House of Representatives Republican John Boehner has stated that the proposal continues to fall short of Republican expectations, thus reinforcing perceptions that Republicans are continuing to play party politics with the debt ceiling, and will probably string it out until the eleventh hour in the hope of wringing out further concessions," said CMC's Mr. Hewson.

Apple's cash I know at least where I'd start if I had $76.2-billion (U.S.). What I don't know - and its shareholders don't, either - is what Apple Inc. plans to do with its cash and securities.

As The Globe and Mail's Omar El Akkad reports, Apple turned in stellar quarterly results late yesterday, boosting its stock price. Buried in its report was the eye-popping amount of money that's sitting around.

What could Apple do?

  • Buy all the state assets Greece has put up for sale, and have change left over.
  • Give each and every American $247, according to The Wall Street Journal.
  • Buy Goldman Sachs Group Inc. , as observers noted yesterday, and get picked on every time you do something.
  • Buy Iceland several times over (based on GDP), and then demand a bailout.
  • Buy Research In Motion Ltd. and have a lot of change left over. (Or buy a hockey team and really rub it in.)

In International Business today Europe's proposal to force shipping fleets to cut emissions of sulphur-dioxide gas will only add painful costs to an industry already in tight straights, William Stoichevski writes from Oslo.

In Personal Finance today You can minimize your mortgage by moving to a cheaper community, like Windsor or Amherst, but there are factors you should consider besides price.

Causation and correlation are important things to consider when digesting the numerous studies out there.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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