Canada Afternoon: C$ Ends Flat After BOC Statement
15:53 EDT Wednesday, May 24, 2006
TORONTO (Dow Jones)--The Canadian dollar is ending little changed on Wednesday after recovering from earlier selling prompted by the Bank of Canada's clear signal that its monetary tightening program is over.
The currency was supported by comments from Canadian Finance Minister Jim Flaherty, who extolled the "rock solid" Canadian economy while speaking in New York.
The U.S. dollar was trading at C$1.1198 at 3:47 p.m. EDT (1947 GMT), from C$ 1.1209 at 8:00 a.m. EDT (1200 GMT), and from C$1.1190 late Tuesday.
The U.S. dollar was hovering around the C$1.1200 area just before 9:00 a.m. EDT (1300 GMT), when the Bank of Canada raised its overnight target rate by 25 basis points to 4.25%, as expected, but issued a policy statement indicating clearly that its rate tightening program is over.
"With today's increase, the target for the overnight rate is now at a level that is expected to keep the Canadian economy on the base-case path projected in the April Monetary Policy Report (MPR) and to return inflation to the 2% target, " the bank's statement said.
In that one key phrase, the bank made it clear it's moved to the policy sidelines after raising its key overnight rate by 25 basis points for the seventh consecutive time.
Although the combination of a rate increase and a statement pointing to the end of the tightening cycle was widely expected, the extent of the bank's candor took analysts by surprise.
"I was a little bit surprised they were so definitive on the statement. I kind of thought that they may well be a little more hedged on their views than that," said Shaun Osborne, financial markets economist with Scotia Capital.
The U.S. dollar gained in the wake of the statement, eventually reaching a sessional high of C$1.1252, but later relinquished its gains.
The fact that the foreign exchange market was not fully convinced the bank would hike Wednesday's was supportive for the currency, Osborne said.
"I think probably a lot of people were short Canada here looking for no move, on the f/x side, and that probably helps explain why Canada has done relatively well," he said.
The Canadian dollar also outperformed in cross trading against the euro and other currencies, Osborne said.
Osborne and other market watchers said comments from Finance Minister Flaherty were supportive for the currency Wednesday.
Flaherty said that Canada is enjoying its 15th year of growth, budget surpluses, low inflation and the lowest unemployment rate in 30 years.
Flaherty declined to comment on the exchange rate level, saying its fluctuations were a matter for the market.
Flaherty Sees Positives To Strong CAD
However, he said that the Canadian dollar had "borne the brunt" of the weaker greenback and had seen "a very substantial adjustment."
Still, Flaherty stressed that there were also benefits to a strong Canadian dollar, noting it had allowed "increased investment in (foreign-produced) machinery and equipment" by Canadian companies, boosting their productivity rates.
Flaherty's remarks suggested a more positive stance towards strength in the Canadian dollar on the part of Prime Minister Stephen Harper's Conservative government than under the previous Liberal administration, Osborne said.
The Bank of Canada's policy statement did not explicitly mention the Canadian dollar Wednesday, although it did say "there has recently been an increased degree of volatility in commodity markets, foreign exchange markets, and financial markets more generally."
While the Canadian dollar is no longer supported by the expectation of further rate hikes, the overall environment remains fairly positive for the currency, analysts said.
"I think the bottom line is that things are pretty good here," Osborne said, noting that Canada is not faced by inflation concerns as the U.S. is.
"In an environment where people are becoming increasingly more risk averse and sensitive to leverage, Canada is not looking such a bad bet, right now," Osborne said.
But the Canadian dollar is unlikely to push to new 28-year highs in the short term, he cautioned. "I think for the immediate future you can forget about C$ 1.1000, or C$1.0900, or whatever," Osborne said.
A more likely scenario is that the U.S. dollar will range between C$1.1150 and C$1.1250, he said. It could wander outside that range, although a break above C$ 1.1300 is unlikely, he added.
Despite several attempts, the U.S. dollar has not been able to break above the high C$1.1200s, he said.
Marc Levesque, chief strategist for North American foreign exchange and fixed income at TD Securities, said the bank's statement has reduced the allure of the Canadian dollar to an extent.
"I think that going forward, the Canadian dollar still has some upside potential, but this has certainly undercut it a little bit," he said.
"But then again, the market was not pricing in 4.50% or 4.75%," he added.
"I think the story going forward is going to largely be a commodities story and a U.S. dollar story," he said.
Commodities are on really shaky ground right now, so that's a big question mark," Levesque said.
Prices for oil and other commodities declined fairly sharply Wednesday.
"The U.S. dollar, I have no doubt in my mind that it's headed lower for the rest of the year. That could provide a fair amount of support for the Canadian dollar over the near term," Levesque said.
"I'm still sticking with my call that within the next couple of months, it's going to hit C$1.0700," he said.
These are the exchange rates at 3:47 p.m. EDT (1947 GMT), 8:00 a.m. EDT (1200 GMT), and late Tuesday.
USD/CAD 1.1198 1.1209 1.1190
EUR/CAD 1.4311 1.4403 1.4395
CAD/JPY 100.53 99.88 99.47
-Don Curren; Dow Jones Newswires;416-306-2020; don.curren@dowjones.com
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