Canadian Dollar Break-out: why you should own the C$?

Canadian Dollar Break-out: why you should own the C$?

CONCLUSION: The CAD$ was up at least 1.4% vs. the €/£/¥/US$ yesterday and is poised for further strength into year-end, following the Bank of Canada's unexpectedly hawkish stance at their April-20 rate decision meeting - leaving rates unchanged at 0.25% BUT putting a June rate hike on the table, as high as 50bps on inflation concerns. Also, there is now a glaring divergence between 2-yr Canada/Euro bond yields (widest in 4 years!)... possibly projecting a further 12% appreciation against the € by year-end.

See attached for our economist's view on the BoC rate meeting + our last CAD$ note highlighting the CAD$ correlation with oil, and below for the write-up from Bloomberg on gov't bond yields.

+------------------------------------------------------------------------------+

Bond Spread May Mean Loonie to Gain More on Euro: Chart of Day
2010-04-21 04:01:11.0 GMT


By Chris Fournier and Cordell Eddings
    April 21 (Bloomberg) -- Canada's dollar may strengthen another 12 percent against the euro by year-end as Canadian and European interest rates and economic prospects diverge.
    The CHART OF THE DAY shows the yield spread between two- year Canadian and generic European government bonds reached the widest in more than four years after the Bank of Canada said yesterday faster-than-expected output growth and inflation will spur increases in the nation's interest rates.
    "The hawkish rate message from the Bank of Canada looks set to drive short-term interest rate spreads even further in the Canadian dollar's favor in the next few months," said Shaun Osborne, Toronto-based chief currency strategist at Toronto Dominion Bank, the nation's second-largest lender.
    Rising interest rates tend to attract investors seeking higher yields, causing currency appreciation. Osborne said the Canadian dollar will appreciate to C$1.20 per euro by Dec. 31, a
12 percent increase from April 19's close at C$1.3684. The loonie, as Canada's currency is sometimes known, gained 2 percent to C$1.3417 per euro yesterday in Toronto.
    Economists in a Bloomberg survey expect Canadian policy makers to raise the overnight rate by a full percentage point to
1.25 percent by year-end. The central bank may begin increases as early as June 1, becoming the first in the Group of Seven nations to do so. The European Central Bank will hold rates at 1 percent until the first quarter of 2011, economists in a separate survey predicted.
    A "recovery-dampening halt" to European air traffic because of a volcanic cloud and the "implicit fiscal drag stemming from austerity measures" in some euro-area countries are reasons to believe the ECB won't raise rates until late 2010, Osborne said.