Canadian Manufacturing

Canadian dollar soars on rate hike, strong economy expectations

Reviews of the rate hike were largely positive, but one rate-watcher cautioned against more increases in 2017, adding that we should "not underestimate how detrimental premature interest rate hikes can be"



TORONTO—The Canadian dollar soared to a level not seen in nearly a year Wednesday after the Bank of Canada announced it was hiking its key lending rate for the first time since 2010.

The loonie was trading at an average price of 78.16 cents US, up 0.76 of a U.S. cent. The last time the currency closed above 78 cents US was in August 2016.

Eric Theoret, a currency strategist and director at Scotiabank, says although the markets had been anticipating a rate increase from the central bank, it was not expecting Bank of Canada governor Stephen Poloz to express so much confidence about the move.

“The expectations were for a dovish hike, which would’ve been seen as the consensus heading into this,” he said. “And really what we had was a very confident, almost hawkish hike in that sense.”

Theoret says the markets were largely forecasting that the bank would reverse rate cuts it put in place in 2015 to help the Canadian economy deal with a plunge in oil prices, and then enter a wait-and-see mode before making any more moves.

But what it’s now reading from the central bank is that any future decisions will be data-dependent.

The dollar has strengthened in recent weeks, buoyed by positive economic data, and growing anticipation of the interest rate decision. The Bank of Canada raised the rate by a quarter of a percentage point to 0.75 per cent, still low by historical standards.

Kash Pashootan, a senior vice-president at First Avenue Advisory, a Raymond James company, says the loonie’s rapid appreciation is being led by fresh expectations that the bank will raise rates again at its next announcement in October.

“On a day like today, it’s nice to see the Canadian dollar stronger and it’s easy to start to build the case for a couple more rate hikes. But it’s crucial that we do not underestimate how detrimental premature interest rate hikes can be to the Canadian economy and to the overall confidence of the equity markets,” he cautioned.

“I don’t believe the Canadian economy can bear another interest rate hike in 2017.”

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