USD/CAD Canadian Dollar Higher After BoC Hikes Interest Rate

07 September, 2017, 01:51 | Author: Brian Mcdaniel
  • Bank of Canada leapfrogs Fed, other central banks on rate hikes

Once branded a bank with an agenda to weaken the currency to support exports, the Bank of Canada's rate increase on Wednesday pushed the loonie up more than a full cent against the greenback. Crude oil is firmer on the day after a strong bounce on Friday but the rate/ spread story is the key driver for the CAD at the moment.

Furthermore, the central bank said it would pay "close attention" to how the economy responds to higher borrowing costs, given households have accumulated record levels of debt.

Canada's annualized growth rate of 4.5 per cent in the second quarter led all G7 countries.

"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broadly-based and self-sustaining", it said in a statement.

The last time the Bank of Canada's main interest rate sat above 1% was in early 2009. The Canadian interest rate is now back to 1.00 percent with two rate hikes in 2017.

Bank of Nova Scotia CEO Brian Porter said that the latest hike and a previous increase of 25 basis points in July would add 2 to 3 basis points in 2018 to the net interest margin achieved by the bank's Canadian business.

Going forward, the central bank said it expects a moderation in the pace of economic growth in the second half of 2017, but already gross domestic product (GDP) is higher than it had forecast.

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"Given the stronger-than-expected economic performance, [the bank] judges that the removal of some of the considerable monetary policy stimulus is warranted".

The Canadian dollar shot up after the announcement. The suggestion is the Canadian dollar gains aren't totally reflective of Canadian growth and it was the first reference to the Canadian dollar in a rate statement since March.

The bank advised that it is still on watch for potential speed bumps, such as geopolitical risks and uncertainties that abound, such as concerns about worldwide trade and undetermined fiscal policies throughout the globe.

The Canadian dollar, meanwhile, climbed more than 10 percent since May to about 81 cents US.

"There remains some excess capacity in Canada's labor market, and wage and price pressures are still more subdued than historical relationship would suggest", according to the statement.

"The Bank has said that future increases will not be "predetermined", which aims perhaps to indicate to the markets that they will not increase the rate a quarter point at each meeting, " wrote CIBC in a note to its clients.

"Particular focus will be given to the evolution of the economy's potential, and to labour market conditions".

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