The Canadian dollar traded higher on Wednesday after the Bank of Canada (BoC) raised the benchmark interest rate by 25 basis points to 0.75 percent. The loonie rose to an 11 month high versus the USD after the rate decision announcement. This is the first rate hike in 7 years for the BoC and while markets had priced in a rate hike in July after several hawkish comments from senior policymakers the central bank surprised by the hawkish outlook. GDP estimates for 2017 and 2018 were upgraded and inflation was forecasted to return to close to the 2 percent target in mid 2018.
The Bank of Canada joins the U.S. Federal Reserve as the only two central banks in the G7 to hike rates but also in dismissing the lack of inflation as temporary. The BoC is also moving to a more data dependant rhetoric but markets still price in another rate hike before the end of the year. The loonie also got support from oil prices who had modest gains after the weekly inventories released by the Energy Information Administration (EIA) showed a larger drawdown than expected. US crude stocks fell by 7.6 million barrels helping crude prices improve by 0.88 percent.
The hawkish BoC was a surprise, but the neutral tone delivered by Fed Chair Janet Yellen during her testimony to the US Congress also depreciated the USD versus the CAD. The Fed Chair did not deviate from the previous comments from FOMC members who stressed a balance sheet reduction would be started this year, at a gradual pace and that interest rate decisions could not be scheduled but rather dictated by the data. Chair Yellen said that she will serve out her term when questioned about a potential nomination to extend her term by the Trump Administration. Yellen’s term expires on February 2018, with President Trump not a fan of her while he was running for President and Gary Cohn a favourite to replace hear at the head of the Federal Reserve.
The USD/CAD lost 1.432 percent on Wednesday. The currency pair is trading at 1.2735 after the Bank of Canada (BoC) raised interest rates by 25 basis points as expected. The benchmark rate in Canada is now 0.75 percent and is expected to be 1.00 percent by the end of the year if economic data confirms the current path of growth. The market had already priced in a rate hike in July after the commitment from BoC speakers about the two rate cuts in 2015 having served their purpose of shielding the economy from falling oil prices. The government was equally hawkish that its fiscal stimulus package released in 2016 had boosted growth.
The lack of momentum of the USD dollar from mostly self inflected political wounds opens the way for the loonie to appreciate in the coming months. A big obstacle before the end of the year will be the NAFTA renegotiations slated to begin in late August. The Trump administration would rather tear the agreement and forge a new one, but at the moment its willing to go ahead at the request of Canada and Mexico. If the hard ball tactics of tariffs are any indication it will be a tough negotiation. Mexico has already said that it could walk out if tariffs are part of the new agreement. Regarding timing Mexican officials have said that they expect the negotiations to be done by before the end of 2017 and not drag on for a long time.
Oil prices rose 0.888 percent in the last 24 hours. The West Texas Intermediate is trading at $45.45 after the release of weekly crude inventories in the US showed a larger than expected drawdown. The API inventories already hinted at a huge drawdown with a 8.1 million barrel drop. The numbers from the Energy Information Administration (EIA) this time were inline with a 7.6 million fall, the biggest decline in 10 months. Ironically this time it was concerns with growing Organization of the Petroleum Exporting Countries (OPEC) production that have limited oil prices form gaining further.
Libya and Nigeria have increased production after several disruptions as they are exempt from the production cut agreement signed between the OPEC and other major producers, but are now likely to be asked to comply. The meeting in Russia on July 24 will not deliver any major changes as its just a compliance meeting not intended to be a summit but Libya and Nigeria have been invited.
Market events to watch this week:
Thursday, July 13
8:30am USD PPI m/m
8:30am USD Unemployment Claims
10:00am USD Fed Chair Yellen Testifies
Friday, July 14
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
