USD/CAD Canadian Dollar Higher After BoC Hikes Interest Rate

The Bank of Canada (BoC) hiked the Canadian benchmark rate by 25 basis points up to 1.00 percent. The move was unexpected by investors in September with better odds of happening in October. There is no press conference today

usdcad Canadian dollar graph, September 6, 2017

The central bank is citing a strong economy to supports its decision:

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth.  There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.

via Bank of Canada

The rest of the statement has a hawkish tone and is optimistic on growth, while at the same time mentioning the geopolitical risks (and uncertainty about international trade). The loonie is trading higher versus the USD after the release.

The high level of household debt and its impact on real estate prices was one of the motivating factors behind the decision and given that the economy is on more solid footing the Governing Council of the Boc made the decision to remove the stimulus it had placed in 2015 with its two rate cuts. The Canadian interest rate is now back to 1.00 percent with two rate hikes in 2017.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza