The Canadian dollar soared after the Bank of Canada raised
interest rates by 25bp to 1 percent. This was the third consecutive
rate hike from the BoC and has made them one of the most aggressive
G20 central banks.
The tone of the monetary policy statement was not nearly as
dovish as some traders feared and therefore the Canadian dollar is
trading sharply higher. Recent economic data may have taken a turn
for the worse and the U.S. recovery may be moderating, but Canadian
officials are hopeful that consumption and business investment will
continue to rise. As a result, they remain in tightening mode after
lifting rates this year from 0.25 to 1 percent. The BoC reminded us
that "financial conditions in Canada have tightened modestly but
remain exceptionally stimulative" which can only be interpreted to
mean that they will continue to normalize monetary policy over the
next few months. We expect the central bank to raise rates by
another 25bp before the end of the year which should keep the
Canadian dollar in demand.
At the same time, it is important to note that "economic
activity in Canada was slightly softer in the second quarter than
the Bank had expected" and the Bank now expects the economic
recovery in Canada to be slightly more gradual than it had
projected in its July Monetary Policy Report (
), largely reflecting a weaker profile for U.S. activity." These
last words give the central bank the flexibility to take a break
from tightening should the recovery in U.S. slow further.
Focus Remains on Europe
Meanwhile the rest of the foreign exchange market is still
focused on Europe. Overnight, concerns about the true degree of
European bank exposure to sovereign debt drove the funding
currencies to fresh highs. The Japanese Yen soared to a new 15 year
high against the U.S. dollar while the Swissy reached a fresh
record high against the euro before retracing after strong bond
auctions suggests that the concerns may be overdone. There was more
than double the amount of demand for Portuguese bonds at today's
auctions than available. Despite this cause for relief, the focus
will remain on the Europe for the time being. There is a
possibility that restructuring plans for Anglo Irish Bank will be
announced today which could weigh on the euro.
Beige Book Up Next
From the U.S., we have the Beige Book report scheduled for release
this afternoon. Friday's non-farm payrolls numbers were much better
than expected and suggest that the labor market may be improving.
Back to school sales have also been fairly good. Although retailers
are relying on discounts to move inventory, tax free shopping weeks
in 17 states and more optimism has made Americans more willing to
spend this season compared the same time last year. The Beige Book
report should acknowledge the pickup in spending and the labor
market. However, the tone of the report will most likely remain
cautious as the signs of improvement have been recent.