This suggests that the short-term interest rates (the target overnight rate) will likely raise 0.5% to 0.75%. However, the banker’s acceptances generally are a quarter point over the prevailing target rate, which suggests the market is pricing an approximate 40% chance that the Bank of Canada will only raise 0.25%.

One month T-bills are at 0.23%, 3-month T-Bills are at 0.47%.

My justification for a 0.5% raise is simple – they want to make a statement.

I rarely have strong feelings about currency trading, but my guess is that the Canadian dollar will spike briefly on the announcement and then will go through a decline.

Most of the media thinks that the Bank of Canada rate increases will result in currency appreciation, but they will get the opposite results – low interest rates causes a lot of currency holding through carry trading. Since traders are on the margin side, a higher rate will result in currency outflows. It is likely the US dollar will be the one to rise relative to the Canadian dollar, so I’d get your cross-border shopping in sooner than later. You can also do “cross-border shopping” by buying US equities. The markets suggest that the US federal reserve will start raising rates around the beginning of 2011.

This can probably be explained by a few factors:

1. Rate differentials: The Bank of Canada is expected to have a higher interest rate than the US Federal Reserve, thus moving carry trade dollars into the Canadian currency;
2. Commodities: Canada is seen internationally as being concentrated with commodity markets. Thus, more demand for Canadian dollars due to high exports of more expensive commodities;
3. Fiscal factors: The Canadian government is less of a fiscal basket case than the US government, thus inspiring confidence in Canadian bonds, thus giving the currency higher value.

The question is whether this trend will continue or whether there will be some sort of regression of the mean (the Canadian dollar traditionally has been around 80 cents US throughout its lifetime). I truly don’t know.

With a strengthened dollar, consumers win because their dollars have higher purchasing power. Prices in Canada are always higher than in the United States, so a cross-border shopping trip will probably have more value realized.

Also, investors should probably take a look at currency concentration and perhaps consider diversifying into US equities if they are primarily concentrated in Canadian currency.

If it takes just one report to get the market jittery on their ultra-bearish stance against the US currency (and by definition this means pro-Gold), I wonder what will happen when any other “good for USA” news comes through the pipeline – there must be a huge amount of traders out there that are going to get caught in the wrong position and start scrambling for the exits.

This is probably just a shot across the bow for these people – I wonder what will happen when there is a direct hit.

While I do not think such an outcome is likely, I do think that the current perception that US money is toilet paper is not quite warranted – to reinforce this idea, go to a Walmart Supercenter and see how far your money goes.