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Bank of Canada Raises Rates to 1.25%; USDCAD Volatile on Poloz Comments

Published January 18, 2018
  • The Bank of Canada raised interest rates by 0.25% yesterday morning, as expected, but the market seemed unable to decide which direction to go. USD very briefly dropped 0.50% to ~1.2340 at 10am EST, and then almost immediately climbed to highs of ~1.2520. USD strength started to taper off after the press conference and over the rest of the afternoon, ending the day very close to where it opened.
  • Items of note from the press conference included the BoC acknowledging the pick-up in wage growth, while assessing that wages are still below target. Increased inflation was also mentioned, with the caveat that uncertainty remains on that front as well. NAFTA is still very much a concern; the potential to harm foreign trade is not insignificant.
  • Market participants have varying opinions as to the future rate path in Canada, with some outliers suggesting 3 more hikes this year and others expecting only 1 more. The BoC seemed to indicate that the economy still needs some accommodative monetary policy (i.e. stimulus), but that the bank’s future decisions will remain data dependent.
  • A portion of yesterday’s USD volatility may also be attributable to an afternoon selloff on news that Congress had yet to reach a deal to avoid a government shutdown.
  • The euro is regaining momentum this morning after yesterday’s comments by ECB officials suggesting unease over euro strength. The euro has been steadily getting stronger after last week’s release of the European Central Bank’s December minutes, which hinted at a winding down of stimulus that is currently in place.
  • Oil prices are slightly lower to start the session on speculation that weekly supply data being released later today will show an increase in inventories. WTI crude is down 0.34% to $63.75 with Brent crude down 0.49% to $69.04 at the time of writing.