The Bank of Canada is feeling feisty. The central bank’s hawkish shift on Wednesday, improving global risk sentiment, and firm oil prices have lifted the currency close to its 2021 peak. It may have further to go.
The BoC may be the first G-10 central bank to raise interest rates, and that is fueling Canadian dollar demand. The BoC upgraded its 2021 growth forecast predicting Gross Domestic Product will rise 6.8%, well above the 3% prediction it made in January. The improved outlook is due to the vaccine rollout progressing, which it expects will spark strong consumption-led growth. The BoC is forecasting that higher commodity prices will drive a solid rebound in commodity prices.
Policymakers believe that economic capacity wasn’t as bad as they previously thought, and businesses plan to speed up the pace of investments. Nevertheless, they think the economy has a lot of slack and requires considerable monetary policy support. Despite that, the central bank announced it would reduce quantitative easing from $4.0 to $3.0 billion per week.
On Monday, the Canadian government tabled its first budget in over two years. It predicted the budget deficit would be $338 billion in 2021, an improvement over October’s guess of $389.0 billion. Interestingly, its growth forecast is only 5.8%, well below the 6.8% predicted by the BoC.
The government did not introduce any new capital gains taxes on investment income. U.S. President Biden announced plans to double his country's capital gains tax to 43.4%, which could have trickle-down impacts in Canada down the road.
The U.S. dollar was on the defensive overnight and opened in New York with losses across the board.
Bitcoin (BTC/USD) suffered badly, falling from $55,471.08 to $47,467.91 because of Biden’s capital gains tax plans.
EUR/USD climbed to $1.2062 from $1.2014, fueled by better than expected Eurozone Purchasing Managers Index data, which suggested the economy was recovering from the pandemic. Traders were also relieved that the European Central Bank monetary policy meeting was as tame as expected. They left interest rates and monetary policy unchanged. Tapering concerns were dismissed after ECB President Christine Lagarde said it was too early to discuss and a decision would be data dependent.
There are not any Canadian or U.S. economic reports today, leaving Canadian dollar direction determined by broad U.S. dollar sentiment and Wall Street.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
