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Loonie spikes after optimistic speech by Bank of Canada official

The Canadian dollar shot up Monday after a speech by a senior Bank of Canada official talking up the positive health of the economy apparently had the market eyeing the possibility of an interest rate hike.

The loonie had been trading near its Friday close of 74.26 cents US, but surged to 75 cents US after a prepared speech by Bank of Canada senior deputy governor Carolyn Wilkins was posted on the central bank’s website. At 4 p.m., the loonie was trading at 75.04 cents US, 

The Bank of Canada is due to make its next interest rate decision on July 12. The bank has not boosted its key overnight rate in seven years.

“As we move past the adjustment to lower oil prices, we are seeing the economy pick up,” Wilkins said in the prepared notes for her speech to the Associates of the Asper School of Business in Winnipeg.

“A couple of weeks ago we got the national accounts data from Statistics Canada for the first quarter of this year. It was pretty impressive, with growth at 3.7 per cent. And the figures show business investment growing again,” she said.

Despite the recent good news, Wikins said slack in the economy is still translating into inflation that is below the bank’s target, while wage gains have been moderate. She also said there are many unknowns surrounding U.S. policy regarding such things as trade, tax and the regulatory environment.

‘Hawkish’ tone

Brian DePratto, a senior economist with TD Economics, said Wilkins’ speech “definitely falls in the ‘hawkish’ column, continuing the recent trend in Bank of Canada communications that has taken place alongside strengthening economic data.

The central bank “appears to be encouraged with the breadth of economic growth that has emerged in Canada in recent quarters,” DePratto said in a commentary. “The broadening of growth suggests an economy that is increasingly finding its legs and shaking off past setbacks.”

However, he doesn’t think the Bank of Canada is ready to start cranking up interest rates just yet.

“A significant haze of uncertainty continues to hang over the economy, and although it is likely that inflation is at or near a nadir, this has yet to be borne out in the data,” DePratto said.

He said Monday’s speech is likely to be aimed at preparing markets for eventual rate hikes  “As economic data remains robust and inflation begins to come back, we would expect a gradual monetary tightening cycle to begin, but think this is most likely to take place in early 2018.”

A commentary from CIBC Capital Markets, while not directly referencing Wilkins’ speech, said they continue to expect a rate hike in the first quarter of next year, “although risks are tilted to an earlier hike if economic data continue to come in strong.”

CBC | Business News