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Economy

Bank of Canada Hawks unlikely to fly too far ahead of Fed

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Bank of Canada expecting strong growth

By Fergal Smith

TORONTO (Reuters) – The Bank of Canada‘s signal that it may begin hiking interest rates before the Federal Reserve has lit a fire under the Canadian dollar, but past tightening cycles show faster liftoff may not be sustained, particularly if the loonie overshoots.

In a move that surprised some investors last week, Canada‘s central bank sharply upgraded its forecasts for economic growth and changed its guidance to show it could start raising its benchmark interest rate from a record low of 0.25% in late 2022.

It also tapered its bond purchases, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programs. The U.S. central bank’s current guidance is to leave interest rates on hold until at least 2024.

Interest rate differentials are a major driver of currency markets. Too strong a currency could reduce the competitiveness of Canada‘s exports, slowing economic growth. Canada sends about 75% of its exports to the United States.

The BoC has begun hiking borrowing costs ahead of the Fed twice since the start of the millennium – in 2002, following the 2001 recession in the United States, and in 2010, after the global financial crisis. In both cases it reversed all of the tightening before a new rate-hike cycle began.

“The idea that the Bank of Canada can go it alone ahead of the Fed without a large number of negative consequences for the Canadian economy is fundamentally flawed,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.

“If the bank maintains its current trajectory and keeps communications as they are, then we see currency appreciation, which hurts the exports sector.”

RED-HOT HOUSING MARKET

Schamotta estimates the loonie’s fair value is 1.2650 per U.S. dollar, or 79.05 U.S. cents. It was trading at 1.2280 on Friday and is up 3.7% since the start of the year.

That is the second biggest gain among Group of 10 currencies, after the Norwegian crown. Norway’s central bank has signaled it could raise interest rates in the second half of this year.

The gap between Canada‘s 2-year bond yield and that of its U.S. equivalent has widened by 14 basis points since January to 16 basis points in favor of the Canadian bond, while money markets expect two BoC rate hikes in 2022, as opposed to one from the Fed, reflecting the Canadian central bank’s more hawkish stance.

“It doesn’t really make sense for the Bank (of Canada) to hike ahead of the Fed,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets. “I think when push comes to shove … they’ll be a lot more patient than I think the market is giving them credit for.”

Soaring commodity prices, a red-hot housing market and an acceleration in the pace of COVID-19 vaccinations have bolstered Canada‘s economic outlook, fueling the loonie’s appreciation. Canadian GDP likely grew by 6.5% in the first quarter, Statistics Canada said.

But that economic optimism could waver if the currency strengthens too much.

“Canadian economic exceptionalism rarely lasts – the loonie could have an Icarus moment in the months to come,” Schamotta said, referring to the Greek mythological character who flew too close to the sun and plunged into the sea when his wings melted.

 

(Reporting by Fergal Smith; Editing by Denny Thomas and Paul Simao)

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Economy

Canadian dollar moves to extend weekly win streak as oil rebounds

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Canadian dollar

The Canadian dollar strengthened against its U.S. counterpart on Friday and was on track for its seventh straight weekly gain as oil prices rose and domestic data added to evidence of robust economic growth in the first quarter.

Canadian factory sales rose 3.5% in March from February, led by the motor vehicle, petroleum and coal, and food product industries, while wholesale trade was up 2.8%, Statistics Canada said.

The price of oil, one of Canada‘s major exports, reversed some of the previous day’s sharp losses as stock markets strengthened, though gains were capped by the coronavirus situation in major oil consumer India and the restart of a fuel pipeline in the United States.

U.S. crude prices rose 1.2% to $64.61 a barrel, while the Canadian dollar was trading 0.6% higher at 1.2093 to the greenback, or 82.69 U.S. cents, moving back in reach of Wednesday’s 6-year peak at 1.2042.

For the week, the loonie was on track to gain 0.3%. It has climbed more than 5% since the start of the year, the biggest gain among G10 currencies, supported by surging commodity prices and a shift last month to a more hawkish stance by the Bank of Canada.

Still, BoC Governor Tiff Macklem said on Thursday if the currency continues to rise, it could create headwinds for exports and business investment as well as affecting monetary policy.

The U.S. dollar fell against a basket of major currencies, pressured by a recovery in risk appetite across markets after Federal Reserve officials helped calm concerns about a quick policy tightening in response to accelerating U.S. inflation.

Canadian government bond yields were lower across much of a flatter curve, with the 10-year down 2 basis points at 1.549%. On Thursday, it touched its highest intraday in eight weeks at 1.624%.

 

(Reporting by Fergal Smith; Editing by Nick Zieminski)

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Economy

Toronto Stock Exchange rises 1.21% to 19,366.69

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Toronto Stock Exchange

* The Toronto Stock Exchange‘s TSX rises 1.21 percent to 19,366.69

* Leading the index were SNC-Lavalin Group Inc <SNC.TO​>, up 16.0%, Village Farms International Inc​, up 9.8%, and Denison Mines Corp​, higher by 9.4%.

* Lagging shares were Aurora Cannabis Inc​​, down 7.2%, Centerra Gold Inc​, down 3.8%, and Canadian National Railway Co​, lower by 3.7%.

* On the TSX 194 issues rose and 35 fell as a 5.5-to-1 ratio favored advancers. There were 25 new highs and no new lows, with total volume of 225.7 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Manulife Financial Corp and Cenovus Energy Inc.

* The TSX’s energy group rose 3.32 points, or 2.7%, while the financials sector climbed 4.80 points, or 1.3%.

* West Texas Intermediate crude futures rose 2.65%, or $1.69, to $65.51 a barrel. Brent crude  rose 2.68%, or $1.8, to $68.85 [O/R]

* The TSX is up 11.1% for the year.

This summary was machine generated May 14 at 21:03 GMT.

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Economy

U.S., Mexico, Canada to hold ‘robust’ talks on trade deal

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The United States, Mexico and Canada will next week hold their first formal talks on their continental trade deal, with particular focus on labor and environmental obligations, the U.S. government said on Friday.

Trade ministers from the three nations are set to meet virtually on Monday and Tuesday to discuss the U.S.-Mexico-Canada (USMCA) deal, which took effect in July 2020.

“The ministers will receive updates about work already underway to advance cooperation … and will hold robust discussions about USMCA’s landmark labor and environmental obligations,” the office of U.S. Trade Representative Katherine Tai said in a statement.

The United States is also reviewing tariffs which may be leading to inflation in the country, economic adviser Cecilia Rouse told reporters at the White House on Friday, a move that could affect hundreds of billions of dollars in trade.

The United States, testing provisions in the new deal aimed at strengthening Mexican unions, this week asked Mexico to investigate alleged abuses at a General Motors Co factory.

(Reporting by David Ljunggren; Editing by Hugh Lawson and Jonathan Oatis)

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