Monetary policy

Another critical piece of the currency outlook puzzle is future action by the BOC. Up until the March 7 BOC meeting, most currency watchers had been forecasting another interest-rate increase at the April 25 meeting. In the wake of new wording from the March 7 meeting, however, many now believe the BOC will keep the overnight call rate at 3.75 percent through the April meeting.

“Previously, the BOC had said that another tightening would be necessary, but on March 7 they basically said another tightening might be necessary,” says Brian Dolan,
director of research at Gain Capital.

Ideaglobal analysts believe the BOC will pause with their rate hikes in April, but that one more rate hike is likely before the end of 2006.

“Inflation has remained subdued,” says Powell. “We do look for another rate hike before the end of 2006, but the timing is uncertain. The Bank is going to need to see further up ticks in that core inflation rate. It will be very datadependent.” “The interest-rate differential is not going to improve to the advantage of the Canadian dollar anytime soon,” Dolan says. That perception was a major factor putting the brakes of the downtrend in Dollar/Canada in March.

The strength of the Canadian dollar itself may be a factor that allows the BOC to slow its rate hike pace. “A weak currency imports inflation, while a strong currency tends to shut the door on inflation,” explains Dolan. Additionally, Dolan says a strong currency tends to slow the export sector of the economy, which has the same impact of rate hikes.