Calgary Alberta Mortgage and Real Estate News

The governor of the Bank of Canada suggested yesterday the Canadian dollar’s recent surge may have gone beyond levels supported by economic fundamentals — but repeated that interest rates may still have to increase to restrain stronger-than-expected growth and inflation.

The delicate balancing act from David Dodge fell short of verbal intervention to talk the currency down, analysts said.

Instead, the bank was acknowledging the currency’s US10¢ surge to the US94¢ territory over the past couple of months will factor prominently in its interest rate deliberations, putting a question mark over hikes beyond an already expected increase in July.

“I don’t think [the currency’s surge] is going to change the fact that they seem to be gearing up still toward a move in July,” said Michael Gregory, senior economist at BMO Capital Markets. “What this did do was throw a little bit of water on the belief we’ve got multiple hikes coming down the pike here, because the currency is now back on their radar screen.”

Mr. Dodge said the loonie has moved well beyond the US86.5¢-to-US89.5¢ range expected in its April update and it has been significantly stronger than other major currencies against the U.S. dollar.

“Much of this appreciation can be linked to such factors as the strength of demand for Canadian goods and services, continuing firm prices for commodities and a positive outlook for Canadian economic growth,” Mr. Dodge said in a speech in St. John’s. “But over this period, it does seem the overall response of the Canadian dollar to these factors appears to have been a bit stronger than historical experience would have suggested.”

The comment indicates the bank thinks the currency’s latest jump may not be driven entirely by the kind of economic fundamentals that would also drive growth — such as strong commodity prices — so it could act as restraint on the economy.

“I don’t think he’s trying to talk the currency down,” said David Wolf, Canadian economist at Merrill Lynch. “I think what he’s trying to suggest is the bank does view the rise in the currency as having done some of its tightening work for it. It shouldn’t diminish anyone’s expectations of higher rates ahead but it also reinforces the fact that any particular quantity of tightening or duration of tightening certainly shouldn’t be a certainty.”

At the same time, Mr. Dodge also pointed out inflation has been stronger than anticipated, service prices continue to run well above 2%, prices for goods have been higher than expected and there is an increased risk future inflation will persist above its 2% target.

In the bank’s May statement, it said “some increase in the target for the overnight rate” may be needed to bring inflation back into line. It was how Mr. Dodge concluded his speech yesterday in St. John’s — and pointed that out at a later press conference.

Marc Levesque, chief economics strategist for TD Securities, said he is maintaining his forecast for a rate hike in July and September but added Mr. Dodge’s comments did “inject a little bit of uncertainty” into the outlook for monetary policy.

Mr. Dodge downplayed the possibility the bank would intervene in foreign exchange markets to restrain the currency like the Reserve Bank of New Zealand did this week, noting markets had not been “disorderly” — a key requirement for Canadian central bank intervention.

“We haven’t had disorderly markets, which is one of the key issues,” Mr. Dodge said. “Nor have we seen an issue where somehow currency alignment has got way, way out of line.”

The cost of borrowing money to buy a home rose another notch late last week as bond yields jumped amid fears that growing inflation pressures are becoming too strong to ignore.

Canada’s largest bank, the Royal announced its residential mortgage rates would increase between 0.10 and 0.15 percentage points, bringing its five-year closed rate to 7.29 per cent.

“The global economy has a lot more momentum than most people, including central bankers believed,” said Doug Porter, deputy chief economist with BMO Nesbitt Burns.

“It’s beginning to put upward pressure on inflation in a variety of areas.”

Interest rates across North America have become the focal point of money watchers lately, with speculation increasing almost daily that the U.S. Federal Reserve may raise rather than lower rates, even if that doesn’t happen immediately.

Earlier this month, the Bank of Canada warned bluntly it could raise interest rates, with expectations the overnight rate of 4.25 per cent could rise a quarter point next month.

Much of Canada’s mortgage market is tied to prime rates, which are based on the central bank’s overnight rate.

On May 29, Canada’s major banks raised their residential mortgage rates by nearly one third of a point in expectation of a rate hike from the Bank of Canada.

The latest rate hikes come against a backdrop of a Canadian housing market that continues to sizzle.

Average resale prices recently climbed above the $300,000 mark for the first time, while sales values and listings all set fresh records this spring driven by a buying frenzy in the west.

The Canadian dollar dipped
against the U.S. dollar on Monday but was still within striking
distance of its recent high as the market looked ahead to a
mid-week speech by Bank of Canada Governor David Dodge.
 Domestic bond prices, which have been under pressure in
recent months, were stuck lower.
 At 8:40 a.m. (1215 GMT) the Canadian unit was at C$1.0615
to the U.S. dollar, or 94.21 U.S. cents, down from C$1.0602 to
the U.S. dollar, or 94.32 U.S. cents, at Friday close.
 The Canadian dollar has eased slightly since touching a
30-year high early last week, but each drop in the currency has
been met with another wave of buying.
 ”Every indication tells us there should be a correction
lower,” said David Watt, senior currency analyst at RBC Capital
Markets. “But any time it seems the Canadian dollar starts to
sell off it seems to get bumped on and people push it back to
levels it has been trading at for the past several days.”
 The latest example of that resilience came on Friday as the
Canadian dollar bowed down to a weak Canadian jobs report, only
to find buying interest at lower levels which buoyed it to a
higher finish than where it started.
 With no key economic reports due in Canada this week, the
market will turn its attention to Dodge’s speech on Wednesday
to the St. John’s Board of Trade.
 Dodge will speak about demographics and labor, but the
market will listen closely for any comments on the Canadian
dollar’s surge and how that could factor into future policy
decisions.
 The Bank of Canada has hinted at imminent monetary policy
tightening and market expectations are now calling for rate
increases in July and September. Higher interest rates would
raise the yield on Canadian investments.
 ”It really just seems like the market is looking for a key
reason to sort of go one way or the other,” said Watt.
 BONDS STUCK LOWER AFTER DATA
 Canadian bond prices were stuck lower after a pair of
Canadian economic reports did little alter current sentiment.
 New housing prices jumped 0.8 percent in April from March,
the biggest monthly gain since August 2006. Canadian industries
ran at 83.0 percent capacity in the first quarter, the first
increase after four quarterly declines, but still a touch shy
of market expectations.
 Bond prices have fallen sharply in the past month, given a
slew of up beat economic reports that have had the market
anticipating rate hikes in the near term.
 ”I don’t think you can attribute it to any particular
positioning at this point in time because frankly the numbers
out today aren’t Grade A figures in Canada and I think I think
people are still taking a breather from last week,” said Eric
Lascelles, strategist at TD Securities.
 The two-year bond was down 5 Canadian cents at C$98.23 to
yield 4.703 percent, while the 10-year bond slipped 5 Canadian
cents to C$95.37 to yield 4.637 percent.
 The yield spread between the two-year and 10-year bond was
-6.9 basis points, compared with -4.9 basis points at the
previous close.
 The 30-year bond slid 20 Canadian cents to C$118.40 to
yield 4.536 percent. In the United States, the 30-year treasury
yielded 5.241 percent.
 The three-month when-issued T-bill yielded 4.33 percent,
unchanged from the previous close.

Canadian government debt fell, pushing yields on two-year bonds to the highest since 2001, on concern that accelerating inflation will prompt central banks worldwide to raise interest rates.“Inflation fears are back in investors’ minds,” said Sal Guatieri, a senior economist with BMO Capital Markets in Toronto. “That’s got bond investors quite worried, and that will continue to push yields higher.”

The yield on Canada’s two-year bond rose 8 basis points this week, or 0.08 percentage point, to 4.68 percent. It reached a peak of 4.72, the highest since August 2001. The price of the 3 3/4 security maturing in June 2009 fell 12 cents to C$98.27 in Toronto. Yields move inversely to prices.

Guatieri said the two-year bond yield may climb to 4.90 percent by the end of the year.

New Zealand’s central bank raised its benchmark interest rate a quarter-percentage point on June 7 to a record 8 percent. Investors in the U.S. reduced bets the Federal Reserve will need to lower borrowing costs this year.

Yields in Canada climbed for a third-straight week as investors raised bets that the Bank of Canada will increase borrowing costs more than once to stem inflation. The yield on the December bankers’ acceptance contract rose to 4.92 percent from 4.53 percent a month ago on the Montreal Exchange.

The central bank held its target rate for overnight lending between banks at 4.25 percent on May 29 and said it may raise borrowing costs “in the near term” should inflation stay above its 2 percent target. Policy makers next meet July 10.

`Deteriorated’ Inflation Climate

“The Canadian inflation climate has deteriorated during recent months,” said Yanick Desnoyers, a senior economist with National Bank Financial in Montreal. “It’s time to get ready for a new round of monetary tightening.”

Consumer prices, excluding volatile components such as energy, accelerated in April to the highest level in more than four years, Statistics Canada said last month.

Canada’s economy added 9,300 jobs last month after shedding 5,200 positions in April, Statistics Canada said yesterday. Employers were expected to add 14,300 new jobs in May, according to the median of 24 economists’ forecasts in a Bloomberg survey. The unemployment rate held at 6.1 percent.

Guatieri said the Bank of Canada will raise interest rates as soon as July “because economic data has been very supportive of this move.”

The Canadian dollar was little changed this week, closing at 94.24 U.S. cents in Toronto yesterday. One U.S. dollar bought C$1.061.