Bank boosts loonie beyond buck

Bank boosts loonie beyond buck
Economists looking for June 1 hike
By John Morrissy, Financial Post
April 21, 2010 

The dollar surged above parity with the U.S. greenback again Tuesday after the Bank of Canada opened the door to a June rate hike and the possibility that Canada will become the first G7 country to begin unwinding emergency-lending rates.

By the end of trading, the loonie had jumped 158 basis points to $1.0012 US after the central bank removed its conditional commitment to keep its key lending rate at a record-low 0.25 per cent until the second half of 2010.

"Removing the conditional commitment to keep rates on hold until July [is] as good as cementing a June 1 hike," Scotia Capital economists Derek Holt and Karen Cordes said in a research note.

"That leaves open the debate over whether 25 basis points or 50 basis points is likely."

In fact, said Shaun Osborne, chief currency strategist at TD Securities, a 25-basis-point hike in June is now priced into currency markets.

Osborne also said it is now likely the loonie will trade higher than the greenback for months to come, as Canada gains the yield advantage of raising rates before the other G7 countries and sports some "enviable" economic characteristics, to use the words of Patti Croft, chief economist at RBC Global Asset Management

According to Osborne's outlook, the loonie will trade at an average of $1.02 US until the second half and rise to $1.05 US in the latter part of the year.

Osborne said the market was caught by surprise by the bank's hawkish outlook, and that the dollar's one-day surge Tuesday was a reflection of its significantly higher outlook for growth, now projected at 3.7 per cent from the previous 2.9-per-cent forecast, and for inflation, now expected to be "slightly higher" than two per cent over the coming year.

"That means they're probably going to have to be quite quick out of the gate in terms of tightening policy," Osborne said. "We're looking for 25-basis-point hikes from June onward for a total of 125 basis points this year.

While that has many observers redrawing their outlook for the high-flying loonie, Croft had a word of caution.

"One of the things that always concerns me is when the consensus becomes too strong one way or another and right now it seems everybody is jumping on the bandwagon of the strong Canadian dollar.

"One of the tricky things about forecasting foreign-exchange rates is that a variety of factors drive currency markets -- and it's not always the same driver. So now it's about the hawkish Bank of Canada, but if we look into the second half of the year we're going to get closer to the [U. S.] Federal Reserve raising rates, so that important support for the Canadian dollar could weaken and take us back below parity.

"I think if people waiting for the dollar to go up further before they exchange money into U.S. dollars for a trip or to buy a vacation home my advice would be to do it sooner than later. Parity may last a long time, or it could be very fleeting."

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