Canadian dollar tops 76 cents US as Poloz comments raise spectre of rate hike

The Canadian dollar gained almost a cent and hit its highest level in four months on Wednesday after Canada's central bank head hinted in an interview that rate hikes could be coming sooner rather than later.

Loonie has climbed to its highest level since February

The loonie has risen to its highest level since February on speculation that the Bank of Canada is getting ready to hike interest rates. (CBC)

The Canadian dollar gained almost a full cent and hit its highest level in four months on Wednesday after Canada's central bank head hinted in an interview that rate hikes could be coming sooner rather than later.

In an interview with U.S. financial network CNBC, Stephen Poloz said rate cuts implemented in 2015 after the price of oil collapsed have had their desired effect.

"It does look as though those cuts have done their job," he said.

If the cuts have done their job, traders Wednesday seem to think that implies the bank is now leaning in the opposite direction for its next policy meeting, slated for July 12.

"We're just approaching a new interest rate decision, so I don't want to prejudge that, but certainly we need to be at least considering that whole situation now that capacity — excess capacity — is being used up steadily," Poloz said.

That lit a fire under the loonie, which rose by almost a full cent to hit  76.73 cents US around 4 p.m. ET.

Bank of Montreal economist Benjamin Reitzes said he noticed a change in tone in the governor's speech.

"He's not going to give it away, but that's a pretty solid signal that a July rate hike is very much on the table," Reitzes said.

"At long last, the Bank of Canada has acknowledged that the economy is in good shape and that the worst of the oil shock has passed," Reitzes said. "It's time to take that stimulus back."

More for their money

All things being equal, a rate hike makes a country's currency stronger, as investors can get more for their money when they invest in assets denominated in that currency.

Currently, most economists still expect the central bank to keep its trend-setting interest rate at 0.5 per cent at the meeting.

Scotiabank economist Derek Holt is one who thinks the bank will stand pat, but that view may change as we get closer to July 12.

"It's an unusual point at which central banks may be deciding to turn more hawkish," Holt said. 

While the speech made no mention of the housing market, Reitzes said cooling down Canadian mortgage growth would be an added benefit to a small hike.

"The desire to instil a bit more discipline in the housing market and borrowers must be a key consideration, lingering in the background," Reitzes said.

The loonie's rise is especially telling considering the continuing weakness in oil prices. West Texas Intermediate slid to just above $44 US a barrel on Wednesday on continuing oversupply issues.

The bank's deputy governor, Lynn Patterson, is scheduled to speak in Calgary at 2 p.m. local time on Wednesday. Her speech is likely to receive increased scrutiny given the loonie's reaction to Poloz earlier in the day.