CAD Surges As BOC Surprise With Second 2017 Rate Hike

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Better Data Fuels Rate Rise

The Bank of Canada took some market participants by surprise yesterday as it raised its headline interest rate for the second time this year.  This second 0.25% has taken rates back up to 1%. Expectations had been fairly evenly split ahead of the meeting with Hawks pointing to firmer data over the summer, specifically the bumper 4.5% 2Q GDP print, while doves highlighted still-subdued core inflation and the likelihood that the bank would not raise at a meeting without a press conference which could be used to explain the move.

BOC Surprised By Strength of Economy

The statement acknowledged the BOC’s own surprise at the recent uptick in data with 2Q GDP the strongest among the G7 economies, saying “Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly based and self-sustaining”.

The bank told investors, when they first raised rates this year, that further rate increases would be data dependent and as such decision to raise rates once more at this time is wholly justified. With that in mind, traders anticipate a steady series of hikes at the bank moves back towards policy normalisation, ending the regime of low-interest rates in the economy.

BOC To Monitor Consumer Behaviour

However, the BOC still need to be careful in terms of how quickly they raise rates so as not to risk damaging consumers who have taken on a record level of debt to purchase houses and bolster their spending. The increase in rates will weigh on these consumers, and if the bank moves too quickly, they risk fuelling a surge in mortgage delinquencies. On this matter, the BOC said that “Given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.”

Technical Perspective

The market reaction saw CAD strongly bid across the board. With the 2016 and prior 2017 lows around 1.2430 now firmly broken, the price is on course to test the next key support at the early 2015 low around 1.1918 ahead of the bigger symmetry objective which completes at 1.1474.  On any retracement higher, the broken 1.2430 level is likely to act as resistance with the focus remaining on further downside.

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