Canadian Dollar Shaken by BoC Threats on Currency Value

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All Bank of Canada meetings are now "live" for anothe rate move .

The Canadian Dollar has steadied through Tuesday trade following a central bank-inspired slide witnessed overnight.

CAD sank following comments made by Bank of Canada deputy governor Timothy Lane that the stronger currency would be a factor in future policy decisions.

This led strategists to rethink expectations over the timing of future interest rate hikes and suggests the BoC might target a lower currency.

In a speech to the Saskatoon Regional Economic Development Authority, Lane spoke of the calamitous effect a strong Canadian Dollar had on Canada’s non-resource exporters up to the financial crisis and throughout the commodity boom, before firing a shot across the bows of Dollar bulls.

“We will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian Dollar,” the deputy governor warned.

"Lane’s remarks signalled central bank wariness over currency appreciation which is bad for growth and inflation. Canada’s rate debate is sure to be impacted by local data Friday on inflation and retail sales," says Joe Manimbo, Senior Market Analyst with Western Union.

Lane’s comments come after the BoC surprised markets earlier in September by pushing through a second interest rate rise, straight on the back of the first one in July.

Expectations have been for the BoC to hike again at its forthcoming October meeting.

“There is clearly an agenda of some sort here and it may be to simply nudge market expectations away from an additional rate increase coming in October and more towards December,” says Shaun Osborne, chief foreign exchange strategist at Scotiabank.

Osborne also floats the idea that the BoC may be uncomfortable with recent CAD strength and notes a recent trend that has seen Bank of Canada deputies being those who deliver the most market moving commentary.

This marks a departure from the time when it would be the BoC chief himself who steered market expectations.

“The BoC seems to be stating quite clearly that there is no more “hand holding” on monetary policy. We consider all meetings now “live” for rate moves,” Osborne adds.

Recent BoC rate hikes, and Lane’s subsequent comments, were a response to stronger than expected growth of the domestic economy.

Canada’s GDP grew at an annualised pace of 4.5% in the second quarter, while annual house price growth has continued to march northward at a double digit clip.

Quite apart from the inflationary aspects, runaway house prices can lead to even higher household debt levels, which are both a focus of BoC policy makers and a financial stability risk.

“We expect another rate tightening in December and Lane noted today that interest rates remain low relative to “neutral”,” says Osborne.

The Canadian Dollar gave ground to the Australian and New Zealand Dollars in London Tuesday, dropping 0.32% and 0.48% respectively, while it gained ground on all of the majors except the Euro.

The Pound-to-Canadian-Dollar rate slid 0.10% during morning trading to be quoted at 1.6574.

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