The Canadian dollar has been having a rather good spring of it. Earlier this week, Bank of Canada officials suggested they may be raising rates later in the year. Well, not exactly, but what Stephen Poloz did say was:
“It isn’t time to throw a party but it does suggest that the interest rate cuts we did two years ago have done their job, and that’s important to us.”
The BoC slashed rates back in 2015 due to falling oil prices. Currency traders will know that the Canadian dollar, or CAD, is heavily dependent on global oil prices. While they are now hovering around the US$50 mark, oil prices are not back at the point where the BoC can raise rates with confidence. However, Poloz did say that it looks like the Canadian economy is gaining momentum. It was enough to send the CAD up against the USD in one of the biggest moves for the currency we have seen this year. Traders will now be keeping a closer price on this pair as they prepare for more bullish comments from the BoC.
The market had originally been expected a rate hike in 2018, but Poloz has got some currency traders wondering now. The BoC is scheduled to revisit Canadian rates on 12 July – could he be sending out a warning that there will be a hike in the offing?
Poloz is not a lone voice crying in the wilderness, however. Senior deputy governor of the BoC, Carolyn Wilkins, was also speaking this week, this time at the Asper School of Business in Winnipeg:
“As growth continues and, ideally, broadens further, the governing council will be assessing whether all the considerable monetary policy stimulus presently in place is still required,” she said. “Just think about it, if you saw a stop light ahead, you would start letting up on the gas so that you slow down smoothly. You don’t want to have to slam on the brakes at the last second.”
Anyone long the CAD against the USD at the start of this week has had a good one. It was trading at 1.34417 on June 12 before Poloz send it off down to 1.31358. If you were spread betting this pair, even at a couple of pounds per pip, you can shut down for the week and go and catch some rays. You have done well.
The question now is whether the BoC will continue to keep plying the market with positive news. We think so. Two key figures have already made public and positive utterances in a short space of time. Central banks do not spout forth in an uncoordinated manner. Officials are very aware that what they say can impact the market.
Ordinarily, we’d say it was worth spending a lot of time on the USD/CAD over the summer, if you are not on the beach. It looks to us like the BoC is gearing up for a rate hike sooner rather than later. Over the border, the Federal Reserve is looking quite hawkish, and the BoC will be aware of the impact of a stronger USD on the Canadian economy, which, like it or not, interacts heavily with the US.
Possible flies in the ointment? Watch the oil price. Weakening oil might cause the BoC to sit on its hands for a little while longer. But at this stage, with global oil stocks gradually declining, and OPEC seemingly getting better at herding non-members into line, we see the oil price trending up, with the possibility of some spikes if there is more political tension in the Middle East. Oil could well go to $60 in the next few months, and this will support the BoC’s argument for raising rates.