Finally, more rate hikes from Canada should continue to attract capital to the loonie. As the pace of Canadian growth accelerated, pushing unemployment to a 30-year low, the BOC commenced an energetic rate-hike program, raising the bank’s target rate from 2.75 percent at the beginning of 2005 to 3.25 percent by the end of the year.
Hawkish comments from BOC Governor David Dodge have many people believing this could very well be the case. Dodge stated “Our job is…to conduct monetary policy so that we achieve our inflation target for the country as a whole,” suggesting that for now, at least, the Bank is willing to err on the side of caution and remain vigilant in its fight against inflation.
Projecting even further out, analysts predict the BOC will hike rates to at least 4 percent by the end of 2006, providing additional fuel for a loonie rise. At a time when U.S. rates are moving lower and Canadian rates are moving higher, we could see USD/CAD inch even closer to parity.
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