As widely expected, the Bank of Canada decided to keep the benchmark interest rate steady at 0.25% last March 2. In the accompanying statement, the bank said that although inflation and economic growth were higher than initially expected, the BOC would continue to employ ultra-accommodative monetary policy until the middle of 2010.
However, it seems that currency traders are doubtful that the BOC will keep true to its commitment. Soon after the statement, the USDCAD sold off like Crosby jerseys and hit a low of 1.0310 before retracing its losses to close the day at 1.0350. All in all this year, the USDCAD has fallen almost 500 pips from its highest price levels.
Why have traders suddenly become bullish on the Canadian dollar?
A look at recent data shows that Canada's economic performance has been strong lately, showing off a slick 5% growth during the fourth quarter of 2009. Looks like Canada is aiming to beat the 5.9% growth posted by the US! Well, Canada's hockey team beat the US in the Winter Olympics so I can't see why their entire economy can't do just the same!
Aside from that, inflation has been relatively stable as the CPI and core CPI rebounded by 0.3% and 0.1% respectively in January. This has brought Canada's annual inflation rate to 1.9%, its fastest pace of increase in over a year.
Compared to the US, Canada's labor market is in a better condition. The jobless rate for Canada currently stands at 8.3%, miles away from Uncle Sam's 9.8%. Then again, the gap could narrow upon the release of the US jobs report on Friday... but that's a different story!
Strong GDP growth prospects. Rising consumer prices. Consistent improvement in the labor markets. Doesn't this remind you of another economy that I just recently wrote about in this very blog? Is that a roar I hear from the Land Down Under?
Driven by robust export demand from China, Australia remained one of the very few major economies that enjoyed an expansion throughout 2009, pushing Australia to the forefront of economic and currency rankings. And just in case you didn't know, Australia's central bank, the RBA, was the only major central bank to hike its interest rate last year.
Well, the BOC never raised its benchmark rate last year. As I've mentioned earlier, the bank's rate remains at 0.25% which is one of the lowest among the major the economies. Still, 2010 appears to be Canada's breakout season given the developments in its economy and in the US as well. If the East team got the Australia-China tandem, Canada and its Big Bro, the US, have been breaking waves as of late in the West.
It looks like we have a good tag-team match on hand. Who do you think is the better duo?
With the economic outlook looking brighter, it's no surprise that traders see a sooner than expected rate hike. And we all know what the prospect of a rate hike does, don't we? That's right - potential Loonie buying! How come? Tsk. Tsk. You've been cutting class to watch curling haven't you?
A higher interest rate helps make Canadian investments and securities more attractive. Now, in order for foreign investors to get their hands on those rising investments, what do they need? If you said Canadian dollars, then you would be correct!
Coupling the prospect of a rate hike with rising inflation, decent growth from the both the US and Canada, improving labor conditions, and a successful hosting of the Winter Olympics to boot, it might not be too long until we see the Loonie hit parity against the dollar!