Canada Dollar Climbs Past Parity After Bank Says Rates to Rise

By Chris Fournier and Mary Childs

April 20 (Bloomberg) -- Canada’s dollar rose the most since January, strengthening beyond parity with its U.S. counterpart, after Bank of Canada policy makers said faster-than-expected economic growth and inflation will spur interest-rate increases. The currency, known as the loonie for the waterfowl on the C$1 coin, gained for the first time in four days as the central bank dropped a pledge to hold its 0.25 percent target rate for overnight loans between banks unchanged through June. The loonie was worth more than the greenback on April 6 for the first time since July 2008 on higher-than-forecast economic growth.

“Dropping the conditional pledge is a very strong pointer to a rate hike coming as soon as June,” said Shaun Osborne, chief currency strategist in Toronto at Toronto-Dominion Bank, Canada’s second-largest lender. “It makes you wonder why they didn’t go today. This is a very strong statement on the near- term outlook for the Canadian economy.”

Canada’s currency strengthened 1.5 percent to 99.94 Canadian cents per U.S. dollar at 10:48 a.m. in Toronto, after appreciating as much as 1.7 percent, the biggest intraday gain since Jan. 4. It closed at C$1.0144 yesterday, when it touched C$1.0216, the weakest level since March 30.

The loonie rose against all 16 of its most-traded counterparts tracked by Bloomberg.

The central bank has held the benchmark interest rate unchanged since April 2009.

“With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus,” policy makers led by Governor Mark Carney said in a statement today from Ottawa. “The extent and timing will depend on the outlook for economic activity and inflation.”

Phrase Dropped

Policy makers dropped the “conditional commitment” phrase to keep the rate unchanged until July unless the inflation outlook shifted. They said inflation will be “slightly higher” than their 2 percent target over the next year, and increased their 2010 economic growth forecast to 3.7 percent from 2.9 percent. Their next meeting is June 1.

“A hawkish tone was expected, but not this strident,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada, the nation’s biggest lender. “It would seem there was at least some discussion of going right away. It’s been pretty clear that such low rates are past their best-before date.”

Economists in a Bloomberg survey predict the central bank will raise the overnight rate to 1.25 percent by year-end, according to the median of 15 estimates. The Federal Reserve will increase its benchmark to 0.75 percent, from a current range of zero to 0.25 percent, another Bloomberg survey showed.

Bankers’ Acceptances

The yield on the June 2010 Canadian bankers’ acceptance contract surged 15.5 basis points to 0.93 percent after the announcement, the biggest jump since June 8, indicating traders are increasing bets that the central bank will accelerate the timeframe for raising borrowing costs.

Money managers and hedge funds use BAX contracts to bet on changes in interest rates and manage their exposure. The contracts have settled at an average of 17 basis points above the central bank’s overnight rate since Bloomberg started tracking the gap in 1992.

“Today’s move in BAX contracts is the largest we’ve seen in some time,” said David Love, a Montreal-based trader of interest-rate derivatives at brokerage Le Groupe Jitney Inc. “Now that it seems clear the Bank of Canada is going to in fact raise rates on June 1 and start a hiking campaign, the contracts have to correct their pricing.”

Consumer Prices Rise

Canada’s consumer prices gained 0.4 percent in February, more than forecast, after rising 0.3 percent in January. They posted a third straight monthly gain in March, increasing 0.2 percent, according to the forecast in a Bloomberg survey before Statistics Canada reports the data on April 23.

The loonie touched 99.54 Canadian cents per U.S. dollar, the strongest level since June 2008, on April 14.

“The trend for a stronger Canadian dollar is in place and we’ll probably see as the week wears on a stronger and stronger Canadian dollar,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto.

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net