Canada Will Be `Relentless' in Pressuring China on Yuan After G-20 Meeting

(Bloomberg – Paul Badertscher)
Canadian policy makers said they will be “relentless” in keeping pressure on China and other economies with fixed exchange rates to allow their currencies to appreciate, following meetings with colleagues from the Group of 20 nations last weekend.

Finance Minister Jim Flaherty and central bank Governor Mark Carney said that while the G-20 made progress on promoting flexible currencies and other issues, they remain a long way from the ultimate goal. “We’re not satisfied with the degree of exchange rate flexibility, the moves on exchange rate flexibility, in key emerging markets,” Carney said in an interview following the meeting in Gyeongju, South Korea. Read more here.

C$ Hits 3-Week High On Rate Expectations

(Reuters)

The Canadian dollar extended gains against its U.S. counterpart on Thursday to its strongest level in three weeks a day after the Bank of Canada raised interest rates for a third straight time and sounded surprisingly hawkish in its outlook.

The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists’ expectations, did not signal a pause at its next scheduled decision in October. It said rates remained “exceptionally stimulative” but kept all options open due to doubts about the U.S. and global recoveries.

“This is follow through on what’s perceived to be the Bank of Canada leaving the door slightly ajar to more hikes,” said Firas Askari, head of foreign exchange trading at BMO Capital Markets. Read more here.

Bank of Canada Hikes Interest Rates to 1%

(Paul Vieira — Financial Post)

The Bank of Canada raised its benchmark interest rate Wednesday by 25 basis points to 1%, arguing financial conditions remain “exceptionally stimulative” even in the face of a slowing — but still growing — economy.

Following the announcement, market watchers said traders increased the odds of another rate hike in 2010. However, others suggested a long pause could be in store as they focused on the final line in the statement that said any further reduction in monetary policy stimulus would need to be “carefully considered in light of the unusual uncertainty” over the economic outlook.

“This is key … as it appears to indicate the Bank of Canada’s intention to pause the [rate-hiking] process,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York, adding the pause could extend beyond the “next meeting or two.” Read more: here.

Odds Rising For Rate Hike Wednesday

(The Financial Post)

What a difference a week makes in gauging the state of the Canadian economy. At the start of last week, few market players believed the Bank of Canada would raise its benchmark rate on Wednesday as concern over its largest trading partner, the United States, mounted. The U.S. economy was believed to be on the verge of flirting with a double-dip recession, given the spate of weak economic data traders had grown accustomed to over the summer.

But two key U.S. pieces of August data released last week — the ISM manufacturing index and non-farm payrolls — were better than expected and suggested the North American economic recovery, while sluggish, marches on and is in no real danger of falling into an abyss. This helped trigger a “vicious” sell-off in bonds, in which investors piled in because of fears of a severe economic slowdown.

The result: The probability that Mark Carney, the Bank of Canada governor, will raise interest rates by 25 basis points, to 1%, increased to slightly more than 60% on Friday from less than 50% as of late August.

The good-looking U.S. data “tipped the scale heavily” toward a rate hike, said Douglas Porter, deputy chief economist at BMO Capital Markets. Read more here.

Related: GDP’s Slow Growth Rate Signal Of Weaknesses (Windsor Star)

Inflation Eases but Rate Hike Still Expected

(Reuters – Louise Egan)

Inflation is not a big threat in Canada right now despite red-hot economic growth, a report showed on Tuesday, but most still expect the central bank to continue raising interest rates next month. A slower pace of gasoline price increases helped the annual inflation rate ease to 1.4% in May from 1.8% in April, Statistics Canada said on Tuesday.

The core rate of inflation, which excludes volatile items like gasoline and is the Bank of Canada’s most trusted gauge of underlying price trends, came in at 1.8% versus 1.9% the previous month. This was just above the 1.7% forecast for May.

“There was really no major surprise here, even though the headline monthly increase looks somewhat on the high side,” said Doug Porter, deputy chief economist with BMO Capital Markets. “The report was quite benign. Overall the main message is that Canadian inflation is really going nowhere fast,” he said.

Read more here. Summary statistics and links to the data files are on the Statistics Canada website at the Statistics Canada website.

Must Shift Trade Focus, Carney Says

(The Canadian Press/Globe & Mail)

Bank of Canada Governor says emerging economies are key drivers of global economic recovery

Canada must shift its trade focus towards emerging economies, which account for two-thirds of global growth and are key drivers of the worldwide economic recovery, says Bank of Canada Governor Mark Carney.

Canada's central bank head said Friday that countries such as China, India and Brazil are becoming growing centres of economic power and have a big impact on the price of oil, metals and other commodities, drivers of Canada's resources economy.

“The relatively slow recovery expected in our most important trading partner, along with ongoing sectoral adjustments, means that Canadian firms have to find new markets,” Mr. Carney said in a prepared speech Friday to a Newfoundland energy conference.

Read more here. Full text of Carney’s speech here (via Reuters).

Raise Rates ‘Without Delay’: OECD

(Tavia Grant — Globe & Mail)

The Bank of Canada should raise interest rates “without delay” and continue to gradually hike throughout this year and next, the OECD said Wednesday.

The recommendation comes just six days before central bank officials announce a decision on whether to boost its key lending rate from a record low.

Strategists had thought, until lately, a June 1st rate hike was a done deal after a string of stronger-than-expected Canadian economic reports. That certainty has ebbed, though, as European debt problems shake global confidence. The OECD, for its part, thinks the central bank should act swiftly to raise rates. Read more here.

Modest Job Gains Soften Rate Hike Expectations

(Reuters – Louise Egan)

Fewer Canadians returned to work in March than expected but the three-month hiring trend was the strongest since the financial crisis intensified in the autumn of 2008, suggesting the recovery is entrenched.

In the first disappointing employment report since December, the economy added 17,900 net jobs in March, following gains of 20,900 in February and 43,000 in January, according to Statistics Canada on Friday. Analysts surveyed by Reuters had forecast a gain of 25,000 positions.

The modest employment gains takes some pressure off the Bank of Canada to raise interest rates and brought markets back to earth after speculation of a hike as early as June. The Canadian dollar fell as low as C$1.0084, or 99.17 U.S. cents after the report, before partially retracing its steps. It was near parity with the U.S. dollar just before the data.

Read more here. Summary statistics and links to the data files are on the Statistics Canada website.

Bank of Canada Official Urges U.S. to Import Less, Export More

(MarketNews.com – Courtney Tower)

The Bank of Canada Monday joined the ranks of those in America who call on the United States to export more and import less, although Canada depends overwhelmingly on sales south of the border. Senior Deputy Governor Paul Jenkins laid heavy importance for world recovery from recession on the United States, and China, reforming their policies and practices – one to reduce debt and the other to reduce savings. The alternative will be world economic growth "neither as strong, nor as sustained, as it could be," he told the Economic Club of Canada in a Toronto speech.

In the midst of powerful trends that are reshaping the world economy, as emerging nations move to total dominance in world output (up to about 55% of total output by 2020), Jenkins said, "Americans need to save more and rebuild household sector wealth." "In the future, more U.S. economic growth must come from net exports – a combination of higher exports and lower imports," he said. Read more here.

The Loonie Looks Ready To Fly

(Financial Post)

Canada in a bit of a quandary. The strong Canadian dollar has proven to be a challenge for Canadian exports as it has made Canadian goods and services more expensive. This leaves the policy makers at the Bank of Canada between the proverbial “rock and a hard place”.

If it decides to raise interest rates aggressively and the US Federal Reserve decides that it can afford to wait to raise interest rates in the US it is likely that the Canadian dollar could be in for a prolonged period of appreciation. The implication for Canadian exports is clearly negative.

The central bank knows that it has to be mindful of preventing inflationary pressures from taking root. On the other hand, Canadian interest rates can only go so far ahead of US interest rates. If the spread between the two countries’ interest rates widens too far in Canada’s favour, then the Canadian economy could be hit with the sledge hammer combination of high interest rates, a surging Canadian dollar and by extension a slumping export sector. Read more here.

Bank of Canada Keeps Rates Low Despite Robust Growth

(Reuters)

The Bank of Canada held its key interest rate at a record low on Tuesday, but signaled it is getting closer to raising rates, though promising again not to do so before the third quarter.

The central bank reiterated the commitment it made in April 2008 to keep its target overnight rate at a record low 0.25 percent until the end of the second quarter, conditional on inflation staying on track.

In its policy statement, however, it acknowledged stronger-than-expected economic growth and inflation and it removed a reference to downside risks to its inflation outlook that had been present in previous statements — all suggesting a slightly more hawkish stance.

“This is a statement that is a little stronger than in the past,” said Eric Lascelles, chief economics and rates strategist at TD Securities. Read more here.

To view the Bank’s policy statement click here.