B of C’s hawkish tone powers banks, loonie
The Canadian dollar surged to a level not seen in four months Wednesday as investors digested a more hawkish tone on interest rates by Bank of Canada governor Stephen Poloz.
The loonie jumped 0.74 of a U.S. cent to an average price of 76.57 cents US after comments from the head of the central bank raised speculation that an interest rate hike could come as early as next month. The currency’s ascent helped send financials stocks higher, with that sector leading gainers on the Toronto’s S&P/TSX composite index, which climbed 74.36 points to 15,355.58.
Bank and insurance stocks typically benefit from higher interest rates because it helps increase profits for short-term loans and increases yields for insurers.
Poloz said in an interview broadcast on business news channel CNBC that the Canadian economy enjoyed “surprisingly” strong growth in the first three months of 2017 and he expected the pace to stay above potential.
He also noted again that interest rate cuts that were put in place in 2015 appear to “have done their job.”
TD Wealth portfolio manager James Morton said the tone of Poloz’s remarks signalled to financial markets that a rate increase at the bank’s next meeting July 12 “is on the table and could certainly be in play.”
But even if a hike does occur, he added, it doesn’t necessarily mean it will be on a fast-moving upward trajectory. “It would be a very small incremental movement,” said Morton, adding that the central bank would “want to make sure they don’t cause too much of a dislocation in terms of other impacts across the market.”
The bank lowered its rate twice in 2015 to the very low level of 0.5 per cent to help offset the effects of the oil-price shock. But Poloz says that growth has rebounded with an “encouraging” pace in recent months.
Meanwhile south of the border, it was a similarly positive day for New York indexes as the Dow Jones industrial average gained 143.95 points to 21,454.61. The S&P 500 index added 21.31 points to 2,440.69 and the Nasdaq composite index was ahead 87.79 points to 6,234.41.
In commodities, the August crude contract advanced 50 cents at US$44.74 per barrel and the August natural gas contract was up three cents at US$3.09 per mmBTU.
The August gold contract gained $2.20 to US$1,249.10 an ounce and the September copper contract climbed a penny at US$2.68 a pound.
In another report Wednesday, intelligence collected from industry sources helped the Bank of Canada navigate the oilprice collapse and a top bank official says invaluable nuggets of information like that will continue to be relied upon for future policy decisions.
In a Calgary speech, deputy governor Lynn Patterson said the central bank has made good use of the insight it’s amassed from contacts such as fellow policy-makers, market participants and company representatives. That source-based information — combined with information taken from models, data and internal analysis — all feed into the bank’s judgment on potential policy actions, she said.
“I can’t emphasize enough how critical these real-time perspectives are to our overall understanding of economic developments, and this is especially true during periods of heightened uncertainty,” Patterson told CFA Society Calgary. “We rely heavily on our excellent models and incoming data for our forecasts. Yet we know that the intelligence that we gather is a critically important complement to them.”
Patterson said this wider reach enables the bank to scoop up more information when significant events, like Brexit and the recent U.S. election, threaten to have an impact on Canadian markets.