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

The Canadian dollar gained almost a full cent and hit itshighest 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 networkCNBC, Stephen Polozsaid 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.

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"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 tohit 76.73 cents US around 4 p.m. ET.

Bank of Montreal economistBenjamin Reitzessaid 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 thata 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 shapeand 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, mosteconomists 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.

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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 toinstila bit more discipline in the housing market and borrowersmust 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.