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Ottawa worred. As value of Canadian dollar raise on world markets.

Canadian Loonie value rise on world markets

Ottawa is worred about the rapid rise in the Canadian dollar on world markets, and on Thursday The Bank of Canada warned,that the continued rapid rise could “fully offset” recent positive developments in the Canadian ecomony.

The statement was issued in its scheduled rate decision, in which the central bank, as widely expected, kept its benchmark rate unchanged at 0.25 per cent, and reiterated its intent to keep it at that level until June, 2010.

Given the expected call on rates, analysts were closely watching this announcement to see if the central bank would acknowledge the recent rise of the dollar, or the ascent in long-term bond yields.

The central bank delivered on the dollar front

Read the full story By Paul Vieira, Financial Post.

OTTAWA — The Bank of Canada warned Thursday that the continued rapid rise of the Canadian dollar could “fully offset” recent positive developments in the economy.

The statement was issued in its scheduled rate decision, in which the central bank, as widely expected, kept its benchmark rate unchanged at 0.25 per cent, and reiterated its intent to keep it at that level until June, 2010.

Given the expected call on rates, analysts were closely watching this announcement to see if the central bank would acknowledge the recent rise of the dollar, or the ascent in long-term bond yields.

The central bank delivered on the dollar front.

It noted financial conditions and commodity prices had “improved significantly” in recent weeks, while consumer and business confidence had “recovered modestly.”

However, the central bank added: “If the unprecedentedly rapid rise in the Canadian dollar — which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency — proves persistent, it could fully offset these positive factors.”

The bank statement was careful in not identifying what it believed was driving up the currency. In the past, factors not linked to economic fundamentals — such as the sudden drop in value of the U.S. dollar — have been of concern to the central bank.

Nor did the bank statement suggest it was prepared to intervene in markets to bring down the dollar’s value.

Since the central bank announced on April 23 it would not pursue so-called quantitative and credit easing, which involves flooding financial markets with cash, the Canadian dollar has gained roughly 12 per cent, from a low of 81.37 cents U.S. to a high set Tuesday of 92.36 cents U.S.. On Wednesday, the dollar lost roughly 2.3 cents U.S., closing the trading session at 90.22 cents U.S..

In a note released prior to the bank’s rate announcement, economists from the Bank of Nova Scotia said it expected the dollar to march toward parity with the U.S. greenback sometime in 2010.

Analysts were unsure how much the central bank’s governing council would say regarding the dollar, with the prevailing wisdom being it would acknowledge its sudden climb and indicate it was monitoring its movements closely.

Meanwhile, the Bank of Canada said the economic data received since the April 23 release of its updated economic forecast were “broadly consistent” with its medium-term outlook for output and inflation. The central bank expects the economy to contract three per cent this year but rebound in 2010 with growth of 2.5 per cent. As for inflation, the forecast is that it will hit its preferred two per cent target by mid-2011. (The bank sets interest rates with the goal of moving core inflation toward two per cent.)

It said the country’s significant output gap would “continue to widen” through the third quarter, putting downward pressure on inflation. Further, the bank said it continued to expect the global and Canadian economic recoveries to be “more muted than usual.”

As well as leaving its benchmark rate unchanged, the operating band — the difference between the what the central bank pays on reserves and what it charges for loans — remains intact at 25 basis points, in an effort to encouraging lending by market participants.

The recent rise in long-term bond yields and general optimism about economic developments have led some economists to suggest the central bank may be forced to raise its key interest rate before its June, 2010 target.

Bank of Nova Scotia economists, for instance, said Thursday morning they expect an increase in the benchmark rate of two percentage points, starting in the first quarter of 2010.

© The Financial Post

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