Will the BOC Break the Ice?

As Pip Diddy said in his roundup, we’ve got tons of high-impact reports coming out this week. The Bank of Canada will be kicking the party off with its interest rate decision tomorrow. The question on everyone’s minds – will the BOC actually raise rates?

As I’ve said in the past, improving economic conditions support the idea of a rate hike. The Canadian economy has been one of the top performers this year, with improvements in the labor and housing markets, coupled with strong spending. Building permits are also the rise, while the unemployment rate appears to have topped out, as data showed a dip in the rate to 8.1%. In addition, core retail sales rose a surprising 1.7%, much higher than initial forecasts, indicating that consumer spending is picking up.

Now if kick-butt economic performance isn’t enough, don’t forget that inflation has been on a tear. The consumer price index released a few weeks back showed that consumer prices rose at an annualized rate of 1.8% last April. This puts the inflation rate within shouting distance of BOC’s target inflation rate of 2.0%.

With all this evidence in front of them, will BOC Governor Mark Carney pull out his interest rate hike stick and release a slap shot into the markets?

If the forecast comes true and the BOC does indeed hikes its base rate, we will probably see the Loonie rally. After all, who doesn’t like higher interest rates!? Just look at the Aussie – that sucker just kept rising when the RBA made a series of interest rate hikes earlier this year.

I must warn you, however, that a whipsaw is just as likely. In this old man’s humble opinion, I believe that Canada’s good economic fundamentals has already been priced-in, so any sort of rally could be met with significant resistance. The 1.0300 region on the USDCAD, for one, may prove to be a very tough support level to crack.

On the other hand, if the BOC decides to “pull a Fed” and hold raising rates, expect the USDCAD to head higher and retest 1.0850, the previous week’s high. Heck, given how overbought the Loonie is, let me go out on a limb here and say that we may even see that level break!

Price action aside, there is really very little argument to the contrary that Canada’s economic outlook is bright. After advancing 0.6% in January, Canada’s monthly GDP increased again by 0.3% in February. With the exception of wholesale trade and the insurance sectors, all components of Canada’s GDP reported growth. Judging from the trend, economists are saying that Canada’s economy might have grown at an annualized rate of 5.3% between January and March of this year.

Although there are still downside risks to economic recovery, Canada is showing all the classic signs of a recovering economy: the unemployment rate is falling, inflation is rising, and consumer activity is picking up. I guess it’s just up to the BOC to confirm these notions and finally break the ice by hiking interest rates!