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Markets

CAD Surges on Hawkish BoC Statement

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Freshly back from holiday and with some sun on their skins, currency traders are feeling more optimistic this morning. Safe haven flows have eased out of low yielding currencies including the U.S. dollar and moved into higher yielding ones such as the euro, Canadian and New Zealand dollars. The Wall Street Journal reported that Germany could drop its calls for restructuring Greek deal as a requirement for additional aid which has helped to boost risk appetite. The first round of U.S. economic data kept the dollar under pressure with house prices falling 0.23 percent in the month of March to its lowest level in 8 years. Later this morning, Chicago PMI and consumer confidence figures will be released and based upon the pull back in other regional manufacturing surveys, we do not expect a strong release.

Meanwhile the action this morning is in the Canadian dollar which skyrocketed after the Bank of Canada rate decision. Although the BoC left interest rates unchanged at 1.00 percent, they are preparing the market for a resumption of tightening. The last time the BoC raised interest rates was in September 2010 and since then they have remained on hold. In recent months, we have seen stronger inflationary pressures and enough improvements in the economy to prompt the BoC to say "some stimulus" will be "eventually withdrawn" which is a noticeable upgrade from the previous months when they simply said a further reduction in monetary policy stimulus would be carefully considered. Despite the recent pull back in commodity prices, the central bank is worried about inflation remaining high and in fact, they expect CPI to be "above 3 percent in the short term." Economic growth is progressing largely as expected with economic activity likely to accelerate once temporary supply chain disruptions are unwound in the coming quarters. The possibility of greater momentum in household borrowing and spending represents an upside risk to inflation but the persistent strength of the Canadian dollar continues to pose a risk for the economy. In other words, the BoC is moving closer to raising interest rates, but a rate hike will depend upon the volatility in the Canadian dollar. If USD/CAD remains above 96 cents, the BoC has more room to move but if the currency pair visits its May lows, the risk of tightening diminishes significantly. For the time being, the hawkish comments from the central bank should attract demand for Canadian dollars.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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