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Canadian dollar poised for more potential gains after BoC raises rates on strong economy

Amid another day of pressure on the US dollar, the big currency mover on Wednesday was clearly the Canadian dollar, and for good reason. The Bank of Canada (BoC), in a surprisingly early policy move, raised its key overnight rate by 25 basis points to 1%, which follows consecutively from the previous BoC rate hike at its last meeting in July.

Many central bank watchers had been expecting a rate hike at some point in the near future, but not until at least October. In its Wednesday statement, the BoC cited better-than-expected recent economic data as rationale for the hike. This data includes strength in consumer spending, jobs and income growth, exports, and business investments. While inflation still lags below the central bank’s target, the BOC statement underscored a “slight increase” in key Canadian inflation measures in contrast with comparatively lower inflation in other developed countries.

The resulting jump in the Canadian dollar was both strong and swift, extending the sharp uptrend against the US dollar (downtrend for USD/CAD) that has been in place since May. Coupled with continued weakness in the US dollar, the Canadian dollar spike after the BoC hike prompted a USD/CAD plunge from just under the key 1.2400 level on Wednesday morning all the way down to dip below 1.2200 before some of those losses were pared later in the day.

As the US Federal Reserve has been sounding an increasingly dovish tone when it comes to interest rate hikes in the US, the current hawkishness of the Bank of Canada stands in sharp contrast. If economic signs in Canada continue to show sustained strength, the likelihood of further BoC rate hikes this year and beyond is high. If this is indeed to be the case, the downtrend for USD/CAD could have significantly further to run. With any continuation of Wednesday’s USD/CAD fall, a sustained breakdown below 1.2200 support has its next major downside target at the important 1.2000 psychological support, a level that has not been hit since May of 2015.

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