Bank of Canada Signals Tighter Monetary Policy

The Bank of Canada voted this morning to leave interestrates at 0.25% but strongly hinted that interest rates would increase soonerthan expected because of the strong economic growth and the fear of inflation. 

The Bank of Canada voted this morning to leave interestrates at 0.25% but strongly hinted that interest rates would increase soonerthan expected because of the strong economic growth and the fear of inflation.For over a year, the BoC has indicated that rates would remain low until atleast July 1. Today’s policy statement indicates that June 1 is likely the daterates will begin to rise.

The policy statement issued by the BoC included thefollowing, “With recent improvements in the economic outlook, the need for suchextraordinary policy is now passing, and it is appropriate to begin to lessenthe degree of monetary stimulus.” With this statement, the BoC removed acommitment made several months ago to keep interest rates at current levelsthrough the middle of the year.

Although this policy shift was widely anticipated byfinancial traders, the USD CAD plunged sharply and closed in a position to takeout the recent main bottom at .9952. Traders feel that the improving economyand likelihood of additional rate hikes during the next few months should keepupside pressure on the Canadian Dollar.

The U.S. Dollar finished mixed, posting gains versus theEuro, Swiss, and Japanese Yen while struggling against the British Pound,Canadian Dollar and Australian Dollar.

The EUR USD remained under pressure on concerns the recentlyapproved European Union rescue package will not be enough to stem the financialslide in Greece.Borrowing costs continue to plague Greece with the cost of debt eatingup much of its cash flow. The spread between Greek Bonds and German Bundsremains wide indicating that investors believe an investment in Greece is ahigh risk proposition. Some European Union members are already anticipating thepossibility of another bailout proposal.

The British Pound surged to the upside this morning followingthe release of better than expected Consumer Price data and managed to hold onto a portion of its gains despite numerous attempts to push it lower.

Today’s CPI figure sent a signal that the Bank of England islikely going to pass on an increase in its quantitative easing program at itsnext meeting in May. The increase in inflation came as a surprise to thecentral bank as well as market participants because the BoE has been warningabout the possibility of deflation.

Gains were most likely being limited on Tuesday by electionconcerns. Many traders feel this market is not likely to trend until after theMay 6th election. Furthermore, traders are still worried the election willresult in a hung parliament which will make it difficult to pass legislation tocurb the wide U.K.budget deficit.

Stronger demand for higher risk assets helped to drive theUSD JPY higher. Signs that the global economic recovery is back on track encouragedinvestors to take on more risky assets like gold, crude oil and equities.Tension over the Goldman Sachs fraud charges eased enough to draw investorsback into higher yielding assets.

The weaker Euro helped trigger a strong rally in the USDCHF. Traders are anticipating more intervention by the Swiss National Bank inan effort to protect the currency and the Swiss export market.

The AUD USD was up sharply on renewed talk of anotherinterest rate hike by the Reserve Bank of Australia in May. The RBA’s minutes released early Tuesdaymorning indicated that policymakers are concerned about inflation because ofincreasing demand for Australian exports. Tuesday’s rally erased much of therecent break that was triggered about a week ago when the government reported fewermortgage applications.

The NZD USD struggled throughout the day after an earlyrally. The initial move to the upside today was triggered by the strong AussieDollar. Traders are currently assessing the odds of an interest rate hike bythe Reserve Bank of New Zealand. The first sign of a rally will be aclose over .7124. A strong acceleration to the upside is likely to occurfollowing a trade through .7199.