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Canadian dollar climbs after hawkish BoC comments

Investors injected further momentum into the Canadian dollar rally, egged on by hawkish comments from policymakers, pushing it to its best level against its US counterpart for 3½ months.

The US dollar fell to below C$1.32 on Wednesday for the first time since February 27 and has declined 4.6 per cent against its neighbour in the past month.

The “loonie”, as it is known, is the best-performing Group of 10 currency in the past week.

It was turbocharged on Monday by remarks from Carolyn Wilkins, Bank of Canada deputy governor, about a pace of economic growth that had been ignited by an improving labour market and stronger demand in provinces that depend on energy, among other factors.

On Tuesday, it was the turn of Stephen Poloz, BoC governor, to reinforce the hawkish slant, saying the next move would be a rate rise rather than a cut. The economy’s momentum suggested the “interest rate cuts we put in place in 2015 have largely done their work”, the governor said.

Investors have been caught out by the shift in the BoC’s stance, having expected a rate rise no earlier than the first half of 2018.

Stephen Gallo, currency analyst at Bank of Montreal, said the policymakers’ comments had led to one rate rise being priced in by December with a risk of investors pricing in up to two rises by then.

A modest rise in the price of oil, Canada’s big export product, would strengthen the market’s rate expectations, he added.

Targeting CS1.29 in the next few weeks, Mr Gallo said the BoC was in a position to adjust its rhetoric to market expectations. “Poloz sealed the deal yesterday when his comments echoed what Wilkins said, so I think we’re in for a further run lower in USDCAD as the BoC can continue to observe the market response and then decide whether it needs to walk the market back again,” Mr Gallo said.

The backdrop to BoC hawkishness is a Federal Reserve meeting on Wednesday that the market assumes will temper an expected rate rise with caution about the US economy’s prospects.

Adam Cole at RBC Capital Markets said the shift in rate sentiment had forced a hasty unwinding of widely held short loonie positions.

“Markets are suddenly contemplating relatively early policy normalisation. Even after the moves over the last two days, however, we are only around 70 per cent priced for a hike this year and the market is still probably heavily short the currency,” said Mr Cole.

The loonie remains the worst-performing G10 currency this year, he pointed out, “so if the BoC keeps sounding hawkish, there should be little resistance to further CAD upside”.