The Canadian dollar rallied overnight and added to those gains in early Toronto trading. The Canadian dollar continues to benefit from the Bank of Canada’s hawkish shift, announced last Wednesday. The BoC said it expects to raise rates in the second half of 2022.
Governor Tiff Macklem and other senior officials constantly repeated: We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until into 2023. The bank has been saying the same thing since October.
That changed at last week’s monetary policy meeting. A rate hike is predicted for the second half of 2022. The BoC upgraded its domestic growth forecast by 2.5% to 6.8% in 2021. The change is a bit of a head-scratcher. The Canadian economy suffered a severe setback between the March and April BoC meetings. Ontario introduced draconian measures to combat the third-wave coronavirus outbreak. Most retail stores are closed, and those open are limited to what they can sell.
The province issued "stay-at-home-orders" for non-essential workers. Alberta, Manitoba, and Saskatchewan have also adopted restrictive measures. For some reason, the BoC brain-trust thinks those measures will not hurt economic growth.
Traders reacted to the BoC news by driving USD/CAD from $1.2635 pre-BoC meeting to $1.2439 today. Analysts are forecasting further losses to $1.2350 in the near term.
FX markets started a busy week slowly. New Zealand markets were closed for ANZAC day. Asia equity indexes were mixed. Japan’s Nikkei 225 closed with small gains while Hong Kong’s Hang Seng index lost ground. European equity indexes have not strayed far from Friday’s close, and Wall Street equity futures are flat.
EUR/USD attempted to rally, climbing from $1.2097 to $1.2118 but weaker than expected German IFO survey results sent the single currency tumbling to 1.2085 in early New York trading. IFO Current Conditions (actual 94.1 vs forecast 94.5), Business Climate (actual 96.8 vs 97.7), and Expectations (actual 99.5 vs forecast 101.4) suggest a delayed German economic recovery.
GBP/USD rallied to $1.3928 from $1.3882, supported by bullish comments from a Bank of England official. Deputy Governor Ben Broadbent predicted "very rapid growth over the next couple of quarters." The rally didn’t hold, and prices retreated to $1.3867 in New York.
U.S. Durable Goods Orders are expected to rise 2.5%.
