Canadian Dollar Rises After BOC Suggests Oil Shock Damage Waning

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The Canadian dollar touched its highest level in two months after the central bank kept borrowing rates unchanged, pointing to signs damage from an oil-price shock may already be fading and manufacturing exports picking up.

The currency gained against all its major peers as the overnight lending rate was kept at 0.75 percent for a second straight meeting, after a surprise cut in January. In its monetary policy report, the Bank of Canada said the economy is responding to the stimulus it added to cushion Canada’s economy from the fall in oil, its largest export, and forecast faster growth later in the year.

“For the Bank of Canada, it comes down to the fact they’re a little more optimistic on the economy than markets are,” Bipan Rai, director of foreign-exchange strategy at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto. “The market is starting to come a little more in line with what the Bank of Canada’s own expectations for domestic growth are this year.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.8 percent to C$1.2389 per U.S. dollar at 12:29 p.m. in Toronto, its highest level since Feb. 17. One loonie buys 80.72 U.S. cents.

Bank of Canada Governor Stephen Poloz cut his growth forecast for the first three months of the year to zero while raising projections for the following two quarterly periods, saying the damage from the oil price was playing out faster than expected and setting the economy up for a rebound. He also brought forward a projection for when inflation will return to its 2 percent target to the first quarter of 2016, from the final three months of next year.

Yield Spread

Poloz also predicted Canada would benefit from stronger growth in the U.S., its largest trading partner, after a disappointing first quarter.

The yield advantage benchmark U.S. government two-year notes enjoyed over their Canadian peers since January disappeared yesterday after a string of better than expected data releases in Canada contrasted with worse than expected data south of the border. Two-year securities are closely tied to investors’ expectations for the direction of a country’s interest rates.

“He’s coming across as optimistic, and that’s certainly the tone the market is going with,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto. “The market is obviously looking at a central bank that is very reluctant to cut rates again.”

Policy Review

The bank said in its quarterly MPR there were signs of improvement in the labor market and the non-energy exports it is counting on to drive economic expansion, with industries sensitive to a lower exchange rate, like aircraft and industrial machinery, expected to lead growth.

The Canadian dollar has depreciated about 20 percent the last two years against its U.S. peer.

The bank reiterated the world’s 11th largest economy will return to full output by around the end of 2016.

The benchmark price for North American crude oil has rebounded off its lows, climbing from $42.03 per barrel March 18 to $54.10 per barrel Wednesday.

“The Bank of Canada already provided a tremendous stimulus jolt to the economy that won’t be felt for months or quarters down the road,” David Rosenberg, chief economist at Gluskin Sheff & Associates, said by phone from Toronto. “With the clouds parting in Europe and the price of oil stabilizing, I have a very difficult time forecasting another rate cut.”

Leaving rates unchanged was forecast by all 22 economists surveyed by Bloomberg News.

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