With the next monetary policy decision just a week away, market participants are increasingly optimistic towards the Bank of Canada’s tightening capabilities, as evidenced by the most recent Loonie surge. Since bottoming out at a one-year low against the US dollar in April, the Canadian dollar has been steadily on the upswing ever since. One of main the catalysts behind the gains in the Canadian currency has been rebounding inflation alongside improved economic activity in the wake of the year over year rally in commodity prices.
Record low interest rates of 0.50% and fiscal stimulus measures have helped steer the economy after the challenging period brought on by the last rout in energy prices. The clearest evidence of this phenomenon has been the 6-straight monthly gains in GDP through the end of April. Although growth slowed to just a modest 0.20% after printing at 0.50% back in March, it remains in positive territory, helping spur expectations of an imminent rate hike next week.
The viewpoint has been corroborated by comments from Stephen Poloz, Bank of Canada Governor, who struck a more hawkish tone during remarks made in Sintra, Portugal. According to Poloz, accommodative policy measures have helped to reverse the economic decline brought on by tumbling oil and gas prices. Furthermore, he observed that economic growth has resumed a more “normal” pace. This development alone was enough to spur increased speculation that a round of tightening would come before the end of 2017. Next week’s updated outlook for the economy may build these expectations further.
However, the economy is encountering some headwinds, especially when considering growing household indebtedness, an overheating property market, and a weakened pace of inflation. After a near 4.00% incline in the Canadian dollar versus its US counterpart during the month of June, the Loonie may find itself in store for a moderate correction, especially if the Bank of Canada disappoints market participants next week.
Loonie Momentum Mirrors Bank of Canada’s Hawkish Posturing
Market Trends - 05/07/2017