Source: The Canadian Press

The Canadian dollar could get a jolt upwards next week from the Bank of Canada’s next scheduled interest rate announcement on Tuesday.

The central bank is expected to leave its key interest rate unchanged at 0.25%, where it has been for a year now as the country recovers from recession.

What traders will be looking for is a key change in wording of part of the bank’s announcement that could provide a hint of when rates will increase.

The bank has said for months that “conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”

There has been speculation recently that the bank could move even sooner to raise interest rates since the economy has been doing far better than expected, while core inflation has been on the rise.

Investors will be watching for any change in that wording, looking for a hint that the Bank of Canada could raise rates as early as its next announcement on June 1.

“Given the steam in the Canadian dollar, I think if the Bank of Canada becomes more hawkish and raises the risk or heightens the risk of an early move, say in June, the dollar could rocket higher and that to us would raise the downside risk to the economy,” said BMO Capital Markets senior economist Sal Guatieri.

“I mean, it’s moved fairly steadily towards parity in recent months. But if it shot up to its modern day high, about 1.10 cents US, over the next month or so then to us that would impose some severe damage on the economy. Exporters and manufacturers don’t have time to adjust to such a sharp appreciation.”

Guatieri said he doesn’t think the bank will change the phrase next week, adding it is mindful that if they raise the prospect of an earlier or more aggressive tightening move, the Canadian dollar “could just get away.”

The loonie last week closed above parity with the U.S. dollar for the first time since May, 2008.

Meanwhile, gains could be elusive on stock markets this week, despite a strong start to the first quarter U.S. earnings season where chip giant Intel and banker JPMorgan Chase were just two of the companies that beat earnings expectations.

But investors are much harder to impress than in previous quarters and those reports weren’t enough to send markets higher last week in Toronto and New York.

“The markets have rallied so much, there is quite a bit already factored in, said Norman Raschkowan, chief investment officer for Mackenzie Financial Corp.

“We’re still looking in the U.S. for earnings growth of better than 30% this year (from last year). That’s quite a hurdle to have to meet and exceed.”

The Canadian earnings season gets under way in earnest in a couple of weeks and Raschkowan believes that reports will be largely positive.

“I think things are going to be good,” he said, adding he’s a bit cautious about the resource sector and “you might see some disappointment with respect to expenses having risen.”

He also thinks the the rise in the Canadian dollar over the last year shouldn’t impact companies too badly, observing that companies were unprepared when the loonie hit parity with the greenback in 2007 for the first since 1976.

“I think companies probably were a little lax the last time, they were sort of caught off guard. And I suspect that this time around, they have put in place more currency hedges, they have reduced their vulnerability to currency,” he said.

“(That) doesn’t mean they have eliminated it but that it’s going to be less disruptive.”