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Canada dollar up after hawkish central bank report

TORONTO: The Canadian dollar ended higher on Wednesday after an monetary policy report update from the Bank of Canada was seen as signalling a hawkish stand on interest rates.

Trading was volatile on Wednesday, with the currency strengthening both before and after the report was issued, slipping lower, and then reasserting itself and climbing higher toward the end of trading.

The Canadian dollar closed at C$1.4533 (68.81 US cents) on Wednesday after closing at C$1.4554 (68.71 US cents) in the previous session.

The currency strengthened in the period leading up to the release of the update, moving from the C$1.4530 area to C$1.4513 just before the report was released.

"I think it was a case of buy the rumour, sell the news," said one Toronto currency trader.

The currency appreciated quickly after headlines about the bank's report hit the news wires, reaching the C$1.4490 area before abruptly surrendering much of its gains.

The report said bank officials expect all-items inflation to approach 3 percent early this year, and foresee gross domestic product growth reaching the upper half of the bank's 2.75 percent to 3.75 percent target range.

The currency slipped back down to C$1.4565 in early afternoon trading, but began climbing higher as trading approached the close.

"As long as the Humphrey-Hawkins testimony is not too hawkish and the (producer price index and consumer price index) in the US is not too strong, Canada's got potential to appreciate quite a bit," the trader said.

US producer price index data for January will be released on Thursday, with the consumer price index following on Friday. Trade data for December will be released in both Canada and the United States on Friday.

Trading in the currency was "very whippy, but very active," the trader added.

The central bank's monetary policy update and subsequent remarks from Bank of Canada Governor Gordon Thiessen sent a clear signal that the bank is poised to tighten rates again, said Benjamin Tal, senior economist with Canadian Imperial Bank of Commerce.

"Actually, this is as clear as it gets when it comes to a central bank. He basically said, I'm going to increase interest rates - period," Tal said.

Thiessen said it was too early to tell if the recent sharp spike in oil prices will persist and will spur pervasive inflation in the Canadian economy, but said the central bank must closely monitor the impact of energy prices on the inflation outlook.

In cross-trading against major currencies, the Canadian dollar was at 75.31 yen and at C$1.4321 against the euro EURX. The Canadian dollar was at A$1.0885 against the Australian dollar.-Reuters