Loonie spikes above US82 cents
Up 10% this year
The Canadian dollar spiked above US82 cents on Wednesday after the Bank of Canada hiked its key interest rate for the second time in 60 days, further fuelling the loonie rally that has coincided with a tighter monetary policy and impressive economic numbers.
Following t he bank’s quarter- point adjustment to 1.0 per cent Wednesday morning, the Canadian dol- lar gained about one- and- ahalf cents, and had appreciated by about 10.3 per cent against the U. S. greenback for the year. The post- hike jump in the loonie’s value brought it to a two-year high, according to Bloomberg, before the dollar settled at 81.76 cents U.S. by 3 p.m. ET.
The 1. 29 per cent increase for the day would make it t he largest daily increase since the Bank of Canada’s last rate announcement on July 12, which was also a quarter- point hike.
In explaining t he decision to bump up its overnight rate target, the Bank of Canada noted that “significant geopolitical risks and uncertainties around international trade and fiscal policies” had helped contribute to a weakening of the U.S. dollar against other major currencies.
“In this context, the Canadian dollar has appreciated, also ref l ecting the relative strength of Canada’s economy ,” said the central bank.
But the dollar’ s flight has analysts pondering how high the loonie could climb. RBC Capital Markets said in a pre- hike note Tuesday that the Canadian dollar was “likely to re- probe ~$ 1.20 ( 83 cents) level over next 6 months.”
Analysts f rom TD Securities, however, said Wednesday that much of t he good news for t he Canadian dollar had been priced in and t hat more strong economic data would be needed to further the loonie’s rally against the U.S. currency.
“True, we think the broad USD t rend is winding down so that should support CAD, but risk- reward is for some stabilization near- term before the pair makes another push lower,” noted TD.
Meanwhile, Andrew Grantham, a senior economist at CIBC, noted the Bank of Canada had still left itself some dollarfriendly wiggle room.
“As such markets may now start pricing in further moves, meaning today’s decision will be positive for the C$ and negative for fixed income,” he wrote.
The central bank’s decision also follows last week’s news that t he Canadian economy expanded by a scorching annualized rate of 4.5 per cent in the second quarter.
A note from Capital Economics said t he interest rate hike was “sooner than markets expected, a sign that policy- makers are supremely confident in the broader economic growth and inflation outlook.”
“Given t he recent strong performance of the economy and despite signs of housing weakness, we wouldn’t completely rule out another rate hike in October ,” wrote Capital economist David Madani.