The Canadian dollar appreciated on Wednesday after the Bank of Canada (BoC) hiked interest rates by 25 basis points. The move was not totally unexpected as the central bank had been hinting at a second rate hike this year, but the timing predicted by analysts was for later in the year given the amount of noise from other central banks happening in September. BoC Governor Stephen Poloz has proven once again that he can be proactive. The BoC has been optimistic about the strength of the Canadian economy and decided to raise rates now rather than later and regardless of what other central banks do or say in September.
The Canadian trade balance deficit shrunk in July to $3.0 billion after imports fell 6 percent with exports decreasing by only 4.9 percent. Falling prices drove the fall in imports and exports had to deal with a stronger loonie. Canadian productivity edged down by 0.1 percent in the second quarter but after a big gain last month (1.3 percent) it didn’t have much impact as traders were awaiting the decision from the Bank of Canada.
The loonie hit a 2 year high after the decision to bring back interest rates to 1.00 percent. The rate cuts of 2015 have served their purpose and the strong pace of GDP growth has made it an easy decision for the BoC even if the timing is questionable given it is front running the September policy meetings for the U.S. Federal Reserve and the European Central Bank (ECB). The ECB will be up next on Thursday at 7:45 am EDT.
The USD/CAD lost 1.311 on Wednesday. The pair is trading at 1.2224 after touching a 2 year low right after the Bank of Canada (BoC) surprised the market with a 25 basis points raise of its benchmark interest rate. The Canadian central bank had adopted a very hawkish view back in June and signalled a rate hike in July. A second rate hike was expected but later in the year as September is anticipated to be an important month for monetary policy meetings in particular for the Fed and the European Central Bank (ECB).
BoC Governor Stephen Poloz did not want to be left out and proactively hiked the interest rate to 1.00 percent. The eagerness of the policy maker to get ahead of the market was also evident back in 2015 when he cut rates twice to stimulate a Canadian economy about to hit by lower oil prices. Comments from the central bank’s leadership pointed to an end of that stimulus as it was no longer needed given the strength of the economy. The rate statement echoed those comments as even the strength of the loonie is not a concern as it is deemed by the central bank to be a reflection of the economy.
West Texas Intermediate rose 1.038 percent on Wednesday. The price of crude is trading at $49.06 after Texan refineries are starting to come back online while at the same time Hurricane Irma threatens to hit Florida on the weekend. Harvey caused a glut of crude as the storm mostly hit refineries with as much as a quarter of US capacity had to be shutdown. Irma on the other hand could threaten crude supplies if platforms have to be taken offline for security reasons.
Weekly US crude inventories was pushed back a day due to the Labor day holiday and will be released on Thursday, September 7 at 11:00 am EDT. Last week’s data showed a big drawdown of 5.4 million barrels but with little refining capacity available crude stocks rose, specially after the US released part of its reserves to out of state refiners to keep gasoline prices from going higher.
Market events to watch this week:
Thursday, September 7
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims
11:00 am USD Crude Oil Inventories
Tentative CNY Trade Balance
Friday, September 8
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Employment Change
