Let's Get Serious About the Loonie

The Bank of Canada's statement yesterday, where it dropped it conditional promise about keeping rates steady and raised this year's growth outlook triggered new Canadian dollar buying. We too have been bullish the Canadian dollar. However, what concerns us is that the market seems to be getting ahead of itself. Forward rates are rising further today after yesterday's advance.

Many now see June 1 hike as a done deal and there is talk in the local press of a 50 bp hike. We had argued that for medium term investors, the difference between a June and July hike was largely irrelevant.

While the odds of a June hike have gone up, we do not see it as a done deal. The weakness reported in today's wholesale sales (-1.2% compared with expectations of a 1% rise and the Jan series revised lower) is a useful reminder that there are many reports out in the near term that could encourage a swing in the pendulum of expectations.

Friday sees the release of March inflation readings and some moderation is anticipated, especially on the core rate. Retail sales will also be reported then. The headline is likely to be boosted by the already-known auto sales. Excluding autos, a still healthy 0.5% increase is expected, compared with 1.8% rise in February. Next week features house and industrial price indices and on April 30, the Feb monthly GDP figures.

BOC Governor recently suggested that he viewed the Canadian dollar through the prism of inflation. Those Canadian dollar bulls buying the Loonie on ideas of a rate hike may find that the C$ strength moderates anticipated tightening trajectory.

Consider that when the Federal Reserve drops its "extended period" phrase, the market is unlikely to immediately conclude a imminent rate hike. Similarly we would argue that given the calendar, the BOC would want to modify its guidance even if was more biased to July than to June in the first place.

The US dollar has fallen almost 3% against the Canadian dollar is as many days and this is rewarding the growing net long speculative positions in the futures market. The US dollar has not traded above CAD1.0 since the BOC's statement yesterday. We continue to like the underlying fundamentals of Canada, but are concerned that the market is exaggerating the bullishness of yesterday's news.