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Briefing highlights

  • Loonie sinks to 75 cents
  • BoC takes cautious stance
  • Odds of March Fed rate hike rise
  • National Bank profit beat estimates

Loonie tumbles

A combination of hawks and doves have sent the Canadian dollar tumbling to about the 75-cent mark.

This began Tuesday when Federal Reserve officials signalled a rising possibility of a mid-March rate increase. It then picked up steam as the Bank of Canada sent a cautious tone to markets even as it cited somewhat better-than-expected economic signs.

“They remain firmly on hold, and have opted to remain focused on the negatives, while largely overlooking the recent string of better data,” Bank of Montreal senior economist Benjamine Reitzes said of central bank Governor Stephen Poloz and his colleagues.

“The BoC’s dovish skew is intended to keep Canadian yields and the loonie under pressure. However, if the data continue to be positive, they won’t be able to deny the obvious for much longer.”

Having traded at around 76 cents U.S. early Tuesday, the Canadian dollar has now tumbled as low as 74.87 cents.

As The Globe and Mail’s Barrie McKenna reports, the central bank held its benchmark overnight rate steady at 0.5 per cent, pointing to “material excess capacity in the economy.”

While economic growth appears to be running “slightly stronger than expected,” exports still face challenges and the Canadian dollar and bond yields are still at levels seen in January.

“While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States,” the central bank added.

The past day has seen a marked shift in currency markets, after two Fed officials raised the odds of another rate increase at their mid-March meeting. Markets now see an 80-per-cent chance that the U.S. central bank will raise its benchmark rate by a quarter of a percentage point on March 15.

“Well, of course, the sharp revision in Fed rate hike expectations for March weighed on the loonie, especially given that the BoC is nowhere close to raising rates in Canada,” said London Capital Group senior market analyst Ipek Ozkardeskaya.

Ms. Ozkardeskaya cited several strong economic signs in Canada, including labour competitiveness, stronger oil prices and a better export showing.

But at the same time, the Bank of Canada’s preferred measure of inflation is tame, allowing Mr. Poloz to sit things out, and at the same time hopefully enjoy the fruits of a lower currency that he complains has already been dragged up along with the greenback since the U.S. election.

“Core inflation remains under control, giving BoC’s Poloz the possibility to remain seated on his hands for a longer period of time, and benefit from the Fed-BoC divergence as much as he could,” Ms. Ozkardeskaya said, adding the loonie could yet sink to 74 cents or even 73.5 cents.

This began Tuesday when John Willliams, president of the San Francisco Federal Reserve, said he doesn’t see the need to wait on a rate move.

Mr. Williams is not a member of the central bank’s policy-setting Federal Open Market Committee. But Bill Dudley, the New York Fed chief, is, and had a significant impact when he told CNN that a tighter benchmark rate is now more compelling.

“That has triggered a sharp repricing of the chance of a March rate hike,” said Kit Juckes of Société Générale.

“If the Fed likes to have the market price a move in before they act, they have now cleared themselves a path, with odds of 80 per cent implied by Fed Funds futures.”

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