Loonie boosted by hints of interest rate hike
The Canadian dollar climbed higher on Tuesday, boosted by central bank governor Stephen Poloz’s latest hints about an interest rate hike.
The loonie was trading at 77.27 cents US on Tuesday, 0.21 of a cent US higher from 77.06 cents US on Friday. The currency last traded above 77 cents in February.
The latest bump in the loonie came after Bank of Canada governor Stephen Poloz reiterated hawkish comments about interest rates in an interview with German newspaper Handelsblatt.
Markets are now pricing in a 54.4 per cent odds of a hike after the Bank of Canada’s next meeting on July 12. A hike would be the bank’s first since 2010. The bank cut interest rates to 0.50 per cent in 2015 and have held steady since.
Analysts now believe the loonie could soar higher still, if stars align for the currency.
The recent surge has been primarily driven by a change in the spread between Canadian and U.S. interest rates, and it has largely ignored the downturn in oil, which is usually positively correlated to the currency.
Crude endured a terrible June, falling below $45 US per barrel during the month as the global supply glut persisted. However, U.S. crude benchmark has been rising in recent days and was trading at $47.25 US at noon on Tuesday, which could give the loonie rally longevity.
“A nudge from oil prices would undoubtedly, help the loonie reach $0.80 US,” wrote Hendrix Vachon, senior economist at Desjardins in a note on June 30.
But the analyst says other conditions would have to be favourable for the loonie to reach the $0.80 US figure, such as strong trade data for May on Thursday and employment figures for June on Friday,
“An unexpected increase in key rates in July would give the loonie added momentum, as the markets could start anticipating a second increase between now and the end of the year,” Vachon said.
Paris-based investment bank Natixis expects a rate hike by the Bank of Canada in October especially if oil prices push higher and the economy continues to outperform the United States.
“Over the medium term, the USD/CAD should test the 1.28/1.27 (0.78 cents US) level before stabilizing on these levels for several months thereafter,” Natixis analysts wrote in a quarterly note to clients on Tuesday.
But at least one analyst believes the loonie rally may already be running out of steam.
“Markets are now broadly looking for a July rate hike, suggesting the loonie’s run could be running out of fuel,” Douglas Porter, chief economist at BMO Financial Group wrote in a report on Tuesday, noting that the market remains short on the currency.