Loonie Jumps, Thanks to a Hawkish Bank of Canada

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The Bank of Canada left rates on hold, but changed the wording of its statement to suggest that the risk of a rate hike is greater and will happen sooner than previously anticipated. This has sent the Canadian dollar broadly higher. Key support for the US dollar is seen near CAD0.9950.

The BOC said that economic conditions no longer warrant extraordinary policy, and it dropped its phrase about keeping rates unchanged through mid-year, conditional on economic conditions. The Bank recognizes that inflation will be slightly higher than the 2% target and this year's growth will be 3.7% from 2.9%. This growth forecasts seems more optimistic than the market. There is some thought that the BOC can move on rates as early as the next meeting June 1. The monetary policy report on April 22 is the next important signal of monetary policy intentions, but the cat is out of the bag with today's statement.

The Bank of Canada now expects that full capacity will be reached by Q2 2011, not Q3. This is important too because, as we have noted, because of weak capital investment and productivity gains Canada tends to experience inflation earlier on in its business cycle.

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