Source: The Canadian Press

Malcolm Morrison

The Canadian dollar could find lift from the Bank of Canada’s announcement on interest rates Tuesday while stock markets will take their cue this week from corporate America and fourth-quarter earnings.

There is little doubt that the Bank of Canada will continue to keep its key interest rate unchanged at one per cent. But the currency, which has been slightly above parity all during January, could find increased buying interest depending on what the central bank says about economic conditions and raising rates during 2011.

“Beyond the January meeting, there is a ton of debate. I’ve never actually seen anything quite like the spectrum of forecasts we have at this point,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“BMO’s view is kind of in the middle of the pack, we have them starting to raise rates in May, but some see it as early as March. Some see it as late as September so forecasters are really of a split decision on this one.”

The central bank raised rates early in 2009, but quit after three consecutive quarter-point hikes as the Canadian economy started to weaken late in the summer. It is also ahead of the U.S. Federal Reserve, which has no plans to raise rates from near zero this year.

But the Bank of Canada would like to resume rate hikes as soon as possible to give it more manoeuvring room.

It also finds itself in the strange position of having its key rate well below the rate of inflation, which in November stood at an annualized rate of 2%.

“So, in the longer term the bank is simply not comfortable with rates at these very low levels”, said Porter.

“But the conundrum or dilemma is that they’re dealing with a situation where our largest trading partner, the U.S., is in an absolute zero rush to raise interest rates and as (Bank of Canada governor) Carney himself has said, there’s only so much the bank can separate itself from the Federal Reserve.”

Higher inflation will be a bigger problem for the central bank if oil prices continue to surge.

Prices are already at two-year highs of over US$90 a barrel and analysts think crude prices will continue rising.

“And energy prices work their way into the equation in many different channels, they can also even affect food prices,” said Porter.

“Eventually I do think the runup that we have seen in raw food prices will work their way down the grocery aisles in the months to come so headline inflation is likely to be under a bit of upward pressure.”

Meanwhile, the stock market could find further lift this week from the latest earnings reports from some of the biggest U.S. corporations.

Apple Inc., IBM Corp. and Citigroup report results when U.S. investors get back to work Tuesday after taking Monday off for Martin Luther King day.

Banking giant Wells Fargo hands in results Wednesday and chipmaker Advanced Micro Devices reports Thursday.

The week ends with earnings from Bank of America and conglomerate General Electric, which many consider the most important of the week with its broad corporate reach into a number of areas from its GE Capital division to jet engine business.

The consensus estimate calls for year over year earnings growth at S&P 500 companies of about 32%. But the results for the first quarter of 2011 will be not quite as rosy.

“It’s the last quarter of easy year over year comparisons,” said Paul Taylor, chief investment officer at BMO Harris Private Banking as the economy.

“It’s going to be single-digit growth rate (for the next quarter), maybe if we’re lucky low double digits but still, let’s keep in mind we’ll likely get an earnings lift in 2011 versus 2010 and likely again in 2012 versus 2011.”

The resource-heavy Toronto stock market found traction last week as U.S. aluminum giant and sector bellwether Alcoa Inc. delivered a better than expected earnings report.

The company, the first Dow component to report its fourth-quarter earnings, also forecasted a 12% increase in global aluminum demand this year.

Investor sentiment also improved during the week as China and Japan signalled support for European measures that could be used to bailout debt-laden economies in the Eurozone.

The S&P/TSX composite index gained 1.44% last week while the Dow industrials netted 0.96%.

On the economic calendar, the major Canadian report data comes out Friday. Statistics Canada’s retail sales report for November is expected to show a rise of 0.4%, likely led by higher revenue at gasoline stations in a reflection of higher crude prices.

Also, November manufacturing shipments come out Thursday and that data is expected to show a 0.5% gain.

The key U.S. number for this week is December housing starts. Economists believe starts came in at 552,000, down slightly from November.