Loonie turns on a dime

The Canadian dollar has rallied by well over a cent against the US dollar in the first two trading sessions of this week, as the Bank of Canada abruptly adjusts its rhetoric on the economy and the interest rate outlook.  Monday saw Senior Deputy Governor Carolyn Wilkins, speaking in Winnipeg, extolling the strength of the Canadian economy and musing aloud about whether the current "significant" monetary stimulus remains appropriate.

As regards the timing of any possible steps to remove some of that stimulus, she used an analogy: "If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly. You don't want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead".  The Bank's stop light is, of course, its inflation target, and as it has repeatedly reminded us in recent months, headline and core inflation measures remain well below the Bank's 2 percent goal.  Moreover, the very low wage increases that continue to be reported even as employment grows suggest that the Bank still has a bit of road to play with before it has to ease off the gas.

Meanwhile, back in Winnipeg....this morning, Bank Governor Stephen Poloz gave an interview to one of that city's radio stations in which he, too, lauded the recent performance of the Canadian economy.  He suggested that this meant that the interest rate cuts implemented by the Bank two years ago had done their job, but cautioned that it wasn't yet time to "throw a party".

The Bank has still left itself plenty of wriggle room here, but Wilkins' and Poloz's statements are by far the clearest indication to date that the Bank's ultra low rate policy must be brought to an end at some stage. This has set analysts at the banks and elsewhere into a frenzy of forecast revision, with many now looking for the first rate hike to come before the end of this year, rather than in the first half of 2018 as most had previously expected.

The Bank of Canada will no doubt spell out its intentions more clearly at in next rate-setting meeting on July 12.  Nobody is expecting a rate hike to come then, but the tone of the rhetoric in the statement, and in the accompanying documents detailing the Bank's forecast, will bear close scrutiny.