The Canadian dollar continued its charge higher against the greenback on Tuesday, a day after comments from a senior central bank official suggesting that policymakers are moving closer to raising interest rates triggered a buying spree.
The loonie, as the currency is colloquially called, strengthened by as much as 0.7 per cent to a three and a half month high of C$1.3225 following a 1.1 per cent rise on Monday. Yield on the country’s 10-year bond climbed another 0.062 percentage points to hit 1.545 per cent – its highest level in almost a month.
The moves comes after Carolyn Wilkins, senior deputy governor at Bank of Canada said in a speech on Monday that the country has largely adjusted to the fallout from the collapse in global crude prices and issued upbeat comments on the economy. She also hinted that the policymakers would need to reassess whether it needs to keep rates at a near record low if growth continues at the current pace.
The change in tone for the central bank, which said earlier this year rate cuts remained on the table, prompted the market to sharply push up the chances of a rate hike this year.
“Billed as an economic update, the remarks read an awful lot like the central bank starting to make the case for a modest tightening in monetary policy later this year—much sooner than many people had thought,” noted analysts at Scotiabank.
Prior to yesterday, most market watchers had expected the BoC to begin raising interest rates in the first half of next year at the earliest. But following Mrs Wilkins’ comments market participants now pin the odds of a rate hike this year at 62 per cent, up from the 29 per cent it was at last Friday.
The Bank of Canada last raised interest rates in September 2010. It cut rates two times in 2015 in the wake of the global oil crash. Since then, the bank has held rates unchanged at a seven year low of 0.5 per cent.
Scotiabank analysts also noted that today’s CAD move was also being magnified by a squeeze on shortsellers who have ramped up their bets against the currency in recent weeks.
Nonetheless, they think the loonie’s current rally can go further still.
Firstly, more hawkish-sounding BoC is coinciding with thoughts that the Fed may pause in its tightening cycle after this week’s move; this means that the BoC may be the only central bank in motion in H2 this year. Secondly, markets will assume that any hike in the coming months will be part of a process and not a one off (more than one hike to factor in, in other words).