Bank of Canada to assess need for low rates, loonie jumps

The Bank of Canada will assess whether it needs to keep interest rates at near-record lows as the economy continues to grow, a senior official said on Monday, raising the prospect a rate hike could come sooner than anticipated and lifting the Canadian dollar.
 
In the bank's most upbeat comments on the economy, Senior Deputy Governor Carolyn Wilkins said first-quarter growth had been "pretty impressive," while the share of sectors adding jobs was growing.
 
"As growth continues and, ideally, broadens further, Governing Council will be assessing whether all of the considerable monetary policy stimulus presently in place is still required," Wilkins told a business audience.
 
The comments sent the Canadian dollar to its strongest level against the greenback since April 18. Wilkins said Canada had largely adjusted to a drop in oil prices that prompted the bank to cut interest rates twice in 2015 to 0.50 percent to bolster the economy, which slipped into a brief recession.
 
The bank makes its next rate decision on July 12. While many economists had expected the bank to begin raising rates in 2018, markets were pricing in 43.6 percent odds of a hike by the end of 2017 following Wilkins' speech.
 
It looks as though the bank is looking to shift gears. There's a decent chance that if things go right over the next few months, rate hikes could be coming sooner than everybody thought.
 
Wilkins said while there were encouraging signs that growth was broadening, the outlook for inflationary pressures mattered most to the bank.
 
Even if only a few sectors were expanding enough to absorb excess capacity, the bank would need to take the appropriate monetary policy action to meet its 2 percent inflation target, she said.
 
Inflation is currently at 1.6 percent, thanks in part to slack in the economy, Wilkins said. She noted other indicators also point to ongoing spare capacity, including only moderate growth in wages.
 
Wilkins said changes in monetary policy could take as long as two years to have their full effect on inflation. This means policymakers must consider not just current economic conditions, but also how they will evolve, she said.
 
"You do not want to have to slam on the brakes at the last second," she said. Uncertainty around tax and trade policies in the United States will likely remain an important uncertainty in the bank's outlook, Wilkins said.
 
The U.S. dollar was steady on Monday with no major U.S. data releases and ahead of Wednesday's Federal Open Market Committee meeting at which the central bank is overwhelmingly expected to increase U.S. interest rates.
 
Britain’s pound was back under pressure, down half a percent, after falling more than 2 percent following last week's snap elections that left the Conservatives short of a ruling majority and cast a cloud of political uncertainty over the country.
 
Fed fund futures prices show investors have priced in about a 96 percent chance that the U.S. central bank raises overnight interest rates to between 1.00 and 1.25 percent on Wednesday.
 
The nearly universal anticipation of a Fed rate hike along with a more accommodative stance from the European Central Bank after last week's policy meeting and an expectation for the Bank of England to stay on the sidelines because of political uncertainty has helped the dollar fight off a spate of recent negative data on the U.S. economy.
 
Ahead of the FOMC meeting things are going to be relatively quiet. The foreign exchange narrative is being dictated by the dynamics of British Prime Minister Theresa May’s negotiations in trying to form enough of a government so the Conservatives have the ability to rule.
 
Sterling fell 0.55 percent to $1.2650. Our forecasts are under review but we have been one of the more bullish houses on the street and it is fairly clear that the risks are to the downside.
 
With a fourth hike in U.S. rates in 18 months now fully priced in for Wednesday, it points to the chance of a weaker greenback after the meeting. We may also see that results from the Bank of Japan's meeting, just over 24 hours later, might prompt some more retracement of the yen's 4-percent gain since mid-May.
 
The hike by the Fed is fully priced but the language will be dovish. What will be interesting will be the BOJ, there have been headlines that the BOJ has been discussing an exit from emergency stimulus. They may well want to bite back against that and the yen has come a long way in the past few weeks.
 
The U.S. dollar index, which tracks the greenback against six major currencies, was little changed at 97.248. The euro also was flat at $1.12.
 
A selloff in technology stocks extended to a second day on Monday, led by losses in Apple, while oil prices rose on signs of inventory declines in the United States.
 
The technology sector rout dragged down all three major U.S. stock indexes and raised concerns about the market's lofty levels.
 
The euro and its bonds rallied after pro-European parties scored in French and Italian elections over the weekend and as stocks jitters raised fresh questions for the Federal Reserve ahead of its policy meeting this week.
 
The Nasdaq was down 0.8 percent after falling 1.8 percent on Friday. Apple was down 3.4 percent, though other tech heavyweights Alphabet, Facebook and Microsoft also were down.
 
At the same time, energy shares, which have had the biggest declines so far this year, added to Friday's gains. The S&P energy index was up 0.8 percent. The S&P technology index was down 1.3 percent on Monday, but remains up 17 percent for the year to date.
 
An ebbing of the reflation trade that was based on U.S. President Donald Trump's tax and spending promises, and a run of negative U.S. economic surprises, have prompted some investors to review the mix of their portfolios.
 
The Dow Jones Industrial Average was down 69.22 points, or 0.33 percent, to 21,202.75, the S&P 500 had lost 8.23 points, or 0.34 percent, to 2,423.54 and the Nasdaq Composite had dropped 51.39 points, or 0.83 percent, to 6,156.53. The pan-European STOXX 600 was down 1 percent.
 
Oil gained on signs of inventory declines in the United States. News that Saudi Arabia will limit volumes of crude to some Asian buyers in July and deepen cuts to the United States also boosted prices. Brent crude futures rose 0.7 percent to $48.50 a barrel, while U.S. crude futures gained 1 percent to $46.29.