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Briefing highlights

  • Loonie cracks 76-cent mark
  • Stephen Poloz’s three options
  • Global markets mixed so far
  • Shaw’s cable business grows

Loonie nears 77 cents

The loonie is surging, cracking the 76.5-cent mark amid further signs that the Bank of Canada is nearing the end of ultralow interest rates.

The U.S. dollar is also under pressure, feeling the effects of Washington politics and so-called Fedspeak.

The loonie has led the charge among major currencies, trading as low as 75.77 cents (U.S.) but as high as 76.84 cents.

While the U.S. currency is troubled, "there also seems to be a large degree of Canadian dollar strength in there," said Elsa Lignos, Royal Bank of Canada's head of foreign exchange strategy in London.

"It started with Stephen Poloz's interview this morning, and has kind of kept going since then."

Ms. Lignos was referring to the central bank governor's interview with CNBC, in which he reiterated that earlier rate cuts, aimed at offsetting the oil shock, have now done their job and that Canada's economy is forecast to moderate, but not "dramatically," and is still "above potential."

Speaking at a gathering in Calgary, Bank of Canada deputy governor Lynn Patterson delivered a message similar to the one from Mr. Poloz, that the oil shock is now pretty much behind us.

"There's not much new in these comments, although the bank is clearly signalling that July is on the table in terms of a rate hike," said Nick Exarhos of CIBC World Markets.

"We're still leaning toward an October move given the recent weakness in the inflation figures, but there's still a few key data points ahead in April GDP this Friday and employment next week which could change our opinion."

There has been a "re-pricing" of Bank of Canada expectations ever since deputy governor Carolyn Wilkins signalled earlier this month that rates may rise sooner than expected, Ms. Lignos added.

"We don't see Poloz making a strong case for a July hike and the repeat of the line that it is not time 'throw a party' is likely to see the odds of a July move sink again," added Mark McCormick, North American head of foreign exchange strategy at TD Securities.

"Instead, we think Poloz will stick to the bank's recent upbeat narrative but is unlikely to provide guidance on the timing of a rate hike."

Bank of Montreal, however, is now projecting Mr. Poloz will raise his benchmark rate at the mid-July meeting. That would be followed by a second increase in January.

"However, if the BoC continues to beat the drum on rate hikes at the July meeting, we're open to moving that call to October," Benjamin Reitzes, BMO's Canadian rates and macro strategist, said of a second hike.

"Looking further out, the BoC is unlikely to move more aggressively than the Fed, but continued above-potential growth should keep the bank on pace for 50 to 75 basis points more of tightening in 2018."

The U.S. dollar, in turn, is sinking for a couple of reasons.

"Firstly, late yesterday voting on the U.S. health care bill was delayed until after the July 4 recess, again raising doubts on the pace and extent of reform," said Adam Cole, RBC's chief currency strategist in London and a colleague of Ms. Lignos.

"Secondly, yesterday was a rare example of bond and equity markets both selling off sharply," he added.

"The moves were provoked by Fed vice chair Fischer's call for 'close monitoring' of rising risk appetite. This is the first time since December that equities and bonds have both fallen significantly."

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Poloz's options

As Citigroup sees it, Mr. Poloz has three options on interest rates.

And markets will be watching closely for signs of what the Bank of Canada governor might be thinking over the next three days.

Here's how Citi Research economist Dana M. Peterson sees as the potential routes for Mr. Poloz and his central bank colleagues after they surprised observers earlier in the month by signalling interest rates could rise sooner than expected:

Option 1 (which you'll like most of all if you're one of those vulnerable types who's drowning in debt): The Bank of Canada could officially drop its "easing" bias at its July meeting, leaving its benchmark rate at an emergency low 0.5 per cent for some time yet.

This would allow the central bank to gain "greater confidence" that the economy has rebounded from its oil troubles, allow time for a pickup in wages and inflation, and allow breathing room to see how Toronto's market bubble, infrastructuring spending and U.S. trade tensions play out.

It will also give Mr. Poloz time to see if and when the Federal Reserve raises rates again, "leading to higher global bond yields and possible stress on Canada's heavily indebted households."

Good news for those folks: This is Ms. Peterson's base case scenario, which would see the Bank of Canada hold off until early next year.

Option 2 (which you won't like): Start raising rates next month and "downplay key uncertainties" noted above, and forget about the renewed pressure on crude prices. Oh, and ignore (my word, not Ms. Peterson's) how higher rates could dampen consumer spending among those of us who have borrowed too much.

Option 3 (which you really won't like): Raises interest rates twice over the course of the July, October and December meetings, thus removing the half-a-percentage-point stimulus the central bank brought in to counter the oil shock.

"This scenario is a possibility if the BoC is confident that the 50 basis points of 'insurance' purchased in the wake of the plunge in oil prices is no longer needed, but higher rates are not quite warranted amid still stimulus-fueled economic growth, modest inflation, and a laundry list of uncertainties," Ms. Peterson said.

Mr. Poloz & Co. have a lot to consider, then, the latest being a recent report from the Bank for International Settlements that warned Canada is at risk of a financial crisis, according to its indicators.

Notably for this discussion, the debt service ratio among borrowers would be in the red zone if interest rates were to rise by 2.5 percentage points, according to the indicators published by the BIS, a body made up of central banks around the world.

Douglas Porter, Bank of Montreal's chief economist, thinks Mr. Poloz should wait it out.

"In summary, even to a card-carrying member of the hawkish club, it would make sense for the bank to stand aside and ensure that the latest sag in oil prices doesn't persist and/or deepen before moving on rates," Mr. Porter said.

"While [economic] growth has been a tremendous pleasant upside surprise for Canada this year, inflation is surprising consistently to the downside, reinforcing the message that there's no rush," he added in a recent report.

"And while Home Capital is less of a concern for housing, the 16 measures taken by the Ontario government seem to have effectively calmed the market, also relieving some pressure on the bank to tighten immediately."

On Friday, Statistics Canada reports another piece of the puzzle when it releases its monthly look at how the economy fared.

Economists expect that report to show a slower pace of economic growth in April, possibly of about 0.1 per cent, but potentially enough to still kick off a second quarter that would see an annual rate of 2 to 2.5 per cent.

Later Friday morning, another piece of the puzzle comes in the central bank's business outlook survey.

"This will be the most closely followed [business outlook survey] in some time as market participants look for clues on potential rate hike timing following the BoC's hawkish shift on June 12," Royal Bank of Canada said in a lookahead.

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