National Bank Financial Inc. says that it is one of two firms expecting the Bank of Canada to halt rate hikes in the face of the fast-rising Canadian dollar. However, 10 others, according to one recent survey, still expect the central bank to hike at its December meeting.

In a new report, NBF notes that it predicted an 85¢ dollar earlier this year, and was met with “some skepticism in business circles”. However, it admits, “We must admit that the speed of the loonie’s appreciation has surprised even us.”

Yet, it’s not yet hiking its forecast for the loonie. “Even if we believe that the bearishness of the U.S. dollar is far from over (on a trade weighted basis), an upcoming shift in the conduct of monetary policy could temporarily limit the rise of the loonie,” it says.

NBF reports that 10 of the 12 economists surveyed last week by Reuters, still expect a Bank move at next week’s meeting. NBF was one of the two participants which predicted no move. “Of course, this survey could change before the next Bank meeting, since many economists mentioned that they would wait for a backward Q3 GDP figure before changing their mind! Using December futures contracts as a guide, money market participants seem much less convinced than Bay Street economists, with less than half of the 25-basis point hikes priced in,” it says.

“In an open economy such as Canada, with exports to the United States representing more than a third of GDP, returning to a neutral monetary stance must necessarily take into consideration the recent exchange rate appreciation given the usual transmission lag,” NBF argues, noting that Q3 corporate profit data released last week by Statistics Canada shows that the profit margin has already been squeezed in several manufacturing industries.

“As soon as Corporate Canada executives start considering an 80, 82 or 85-cent (U.S.) average as a working assumption in their 2005 business plan, we will have a better sense of the implications of the loonie’s rise on earnings and jobs.”

If nothing else, NBF says that “it appears to us very important that the Bank adopt a much different tone in its press release that is traditionally attached to its decision and remove any reference to a monetary accommodative stance. Seen in the context of this ongoing U.S. dollar bear market, repeating any reference to monetary accommodation could potentially fuel a further rise of the loonie. Since it is difficult to assess if this recent loonie surge is only related to economic fundamentals, Governor David Dodge and his crew should be well advised to take a break until next spring to monitor the impact of the economic activity.”

http://www.nbf.ca