Bank of Canada Also Meets Today and C$ Sensitive

No doubt the greater interest lies with the ECB President Trichet's press conference, details about the covered bond purchases and new staff forecasts, but the Bank of Canada also meets today. There is no doubt that the BOC will leave the overnight rate at 25 bp. It has promised to leave it there until at middle of next year. The promise is an attempt to influence psychology--rates are not simply low but they will remain low for a long time.

At the April meeting, the Bank of Canada said would consider quantitative easing. The economic data and financial market have generally improved since the BOC last met. The equity market has risen by more than 10%. Bond yields have backed up, but Canadian bonds have outperformed not only US Treasuries but also most European bonds.

The BOC can keep continue to study quantitative easing strategies and monitor developments. On the other hand, the strength of the Canadian dollar may be something the BOC wants to draw attention to. It has appreciated by nearly 12% against the US dollar since the April meeting. First quarter GDP data out earlier this week showed that exports collapsed at an annualized rate of 30%. While the deterioration of US demand is the key, the sharp rise of the Loonie is not doing the country any favors and to some extent, the appreciation is tantamount to some tightening of policy.

Given that Fin Min Flaherty indicated a level of concern about the Canadian dollar's strength in late May, if the Bank of Canada does not identify the currency's strength as potentially counter-productive, the Canadian dollar may catch a bid.

The US dollar has run into offers in the CAD1.1150 area, which corresponds to a retracement objective off peak on May 26th's high. Initial support for the US dollar comes in near CAD1.1020 and a convincing break of CAD1.10 would likely re-invigorate the CAD bulls to look again at the CAD1.08 area.