Bank Of Canada Raises Interest Rates To 1.00%, Canadian Dollar Spikes Stronger

Violet Powell
September 7, 2017

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.

"There is some concern that a rate hike is too much too fast", said Shailesh Kshatriya, director for Canadian strategies at Russell Investments Canada. There was no Monetary Policy Report or news conference to explain a move higher.

Canada's currency surged to its strongest level in two years, short-term bond yields hit a five-year high and the country's main stock index slipped on Wednesday after the Bank of Canada surprised many by raising interest rates.

Bank of Canada snapped traders out of their slumber on Wednesday with an unexpected decision to hike interest rates. Futures trading was assigning about a 40 per cent chance of an increase. 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.

The Canadian dollar continued its upward climb on the news, trading up around 81.8 US cents to gain about 1.2% on the day and 1.6% already this week.

Adding to the market reaction was the fact the bank didn't repeat language from previous statements about the current degree of stimulus being "appropriate", which suggests it will stay on its tightening path.

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"The Bank of Canada feels it is behind", Frances Donald, senior economist at Manulife Asset Management, wrote in a tweet. He changed his forecast last week to correctly predict therate increase. In effect, the bank fully removed the two rate cuts from 2015, which were meant to counter the negative impact of falling commodity prices.

According to the statement, recent data has been stronger than expected, supporting the bank's view that growth is becoming more broadly based and self-sustaining.

In a statement, the Bank of Canada noted that consumer spending remains robust, "underpinned by continued solid employment and income growth".

Future rate decisions, the bank said, would continue to be guided by economic data and financial market developments.

The Bank of Canada said there remains "significant geopolitical risks and uncertainties" around global trade and fiscal policies that have weakened the U.S. dollar.

The explanation regarding the Canadian dollar's rise suggests the central bank "isn't quite as obsessed" with the currency's value versus the USA dollar as traders had long believed, according to Bipan Rai, currency strategist with Canadian Imperial Bank of Commerce. The lift to the Canadian dollar will make exports more expensive in the United States, the country's largest market.

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