The Bank of Canada made its move – Canada’s interest rate was raised by 0.25% to 0.5%. Canada is the second Western country to raise the rates after Australia. With today’s gloomy atmosphere, reflected also in the BOC Statement, the loonie is retreating.
USD/CAD is now trading at 1.0530, higher than before the statement, while still staying within the 1.04-1.0550 range it traded A rate hike usually boosts the currency. The reaction is different and it has two reasons:
First, the decision was anticipated. The BOC made it clear that a rate hike was coming soon. While some economists thought that Mark Carney would wait until the next meeting, on July 20th, most economists foresaw the rise at this time.
The second reason is the wording of the rate statement. On one hand, the BOC stated the strength of the economy, that is well reflected in the GDP. But on the other hand, it mentioned again and again the troubles in Europe. The uneven global recovery currently has a small impact on Canada, via oil prices, but is still causing worries. Here’s a quote:
The global economic recovery is proceeding but is increasingly uneven across countries, with strong momentum in emerging market economies, some consolidation of the recovery in the United States, Japan and other industrialized economies, and the possibility of renewed weakness in Europe. The required rebalancing of global growth has not yet materialized.
These worries about Europe mean that the BOC will be very careful with raising the rates again. Global slowdown means that prices will also remain under control. Without a rise in inflation, there won’t be another rise in the rates. Not soon.
Just today, EUR/USD reached fresh multi-year lows. The growing fears of a double dip recession in Europe sent the common currency further down.
Earlier this week, Canadian GDP surprised with a leap of 0.6% in March, closing an excellent Q1 for Canada. With an annual growth rate of 6.1% in the first quarter, double the American figure, the US economy can only envy the Canadian one. Following the GDP release, USD/CAD approached the critical technical level of 1.04, but bounced back. It continued by trading in a perfect range – 1.04 to 1.0550.
Note that also in jobs, the current American unemployment rate stands on 9.9%, while the Canadian rate is at 8.1%. This big gap is expected to remain unchanged. On Friday, Canada will release its fresh employment figures at 11:00 GMT. At 12:30 GMT, an hour and a half later, American Non-Farm Payrolls (and the unemployment rate are released). This will supply a great showdown for the USD/CAD, which is already experiencing a very busy and very tense week.
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