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The Pound Retraces Canadian Dollar Losses, but Bank of Canada Stance Keeps CAD a Favourite

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The Pound to Canadian Dollar exchange rate (GBP/CAD) has recovered to reach 1.6484 having gone below 1.64 at one point over the course of the previous 24 hours.

The retracement comes amidst oversold conditions in GBP/CAD which has been under pressure since May now when the highs at 1.78 were rejected.

The Canadian Dollar is likely to maintain the pressure on Sterling going forward though thanks to the Bank of Canada entering a cycle of interest rate rises.

In a widely-expected move, the Bank of Canada raised its basic interest rate by 0.25% to take the overall rate to 0.75%.

This in turn pushes up the return offered by Canadian bonds making the country a more desirable destination for global investors to park their capital, which in turn drives up the value of CAD.

More rate rises are likely.

In a statement accompanying the move, the Bank hinted that there is a strong possibility that another rate rise is coming in 2017.

This is the big news for foreign exchange markets with many expecting this hike to be a one-off move.

The Canadian Dollar reacted by moving higher against a host of currencies and is now the day and month’s best-performing currency.

“The Bank of Canada went out of its way to tell markets what it intended to do, so in terms of immediate market moves, its actions will therefore speak less loudly than its words. Bonds and the Canadian dollar, after all, had already built in today's quarter point hike,” says Avery Shenfeld at CIBC Economics.

Its policy statement ties today's move to an early step to ward off future inflation, but the BoC was also moving in concert with other Ottawa policies aimed at cooling mortgage activity that the economy doesn't need to sustain job gains.

Forecast changes released by the Bank still imply a deceleration in the second half, but the 2.8% growth this year is enough to close the output gap by year end, and bring inflation to 2% by the middle of 2018.

The Bank sees recent inflation numbers as a temporary lull, and its Q2 forecast implies a rebound in monthly seasonally adjusted data as early as June.

“No detailed hints on when the next hike is coming other than boilerplate language that it will depend on the data, but October (the next MPR) is our favoured pick, since by skipping September the Bank can signal that this will be a gradual process,” says Shenfield.

The Canadian Dollar’s rally shows just how supportive a central bank that is entering a path of raising rates can be, something that those watching the Euro are also aware of.

On all accounts, the Canadian Dollar is likely to see some follow-through strength from here.

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