Loonie Spikes After Bank Of Canada Raises Rates For The First Time Since 2010... As Expected

Tyler Durden's picture

Heading into today's meeting with a smorgasbord of 'relatively' good data recently, Governor Poloz had the perfect excuse to raise rates (for the first time since 2010) and tamp down the firey bubble in home prices. Not a total surprise, given hawkish comments from BOC officials in recent weeks, but the Loonie is surging on the hike but CAD stocks (which were rallying into the decision) are limping lower.

The Bank of Canada raised interest rates for the first time since 2010, citing a recent acceleration of growth that it predicts will eliminate fully the economy’s economic slack by the end of this year.

Odds of a hike were at 90% heading into the decision, so it is perhaps a little odd that the Loonie is so exuberant (perhaps combined with Yellen's dovishness?)

This is the strongest for the Canadian Dollar since Aug 2016...

Recent data had been strong...

  • * April manufacturing sales (MoM): 1.1% vs estimate 0.9%
  • * April wholesale trade sales (MoM): 1% vs estimate 0.5%
  • * April retail sales (MoM): 0.8% vs estimate 0.3%
  • * June jobs added: 45.3k vs estimate 10k
  • * June housing starts: 212.7k vs estimate 200k

By raising rates, the Bank of Canada is simply taking back some of the emergency stimulus it granted in 2015.

However, Bloomberg economist Yamarone says a number of meaningful impediments lay ahead for the Canadian economy: 

  1. Oil prices that seemingly have an aversion to reaching $50 a barrel. 
  2. A regional housing bubble. 
  3. Near-record household indebtedness. 
  4. A recent Moody’s downgrade of the big six banks.
  5. Potential protectionist (and uncertain) policies south of the border. 
  6. Some provinces are adopting restrictive fiscal policies.
  7. Legislation for a $15 minimum wage is being tossed around by some areas.

Interestingly, Bloombergnotes that BOC dropped its hope for a Trump Bump...

The Bank of Canada dropped its assumption that U.S. fiscal policy changes would add to growth stateside (and in turn, offer a modest boost to Canadian activity) over its projection horizon.


In January, the BoC penciled in personal and corporate tax cuts for the U.S. in short order. In April, they maintained their positive fiscal assumptions for the U.S. but also added in downsides pertaining to uncertainty weighing on trade and investment, which had turned the Trump effect into a slight net negative for Canada.

BoC said recent data has increased “confidence” the economy will continue to grow above potential, meaning excess capacity is being absorbed. It estimates the economy will return to full capacity by the end of 2017. BoC downplayed recent weakness in inflation, judging the sluggishness as “mostly temporary.” It predicts inflation will return “close to” its target of 2 percent by the middle of 2018 -- which is later than it had predicted in April. It gave a nod to the sluggishness by saying the overnight rate will be guided by its inflation outlook.

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LawsofPhysics's picture

Damn, now that was a good trade.  Call me crazy/loonie...

skbull44's picture

The 'interesting' aspect of the narrative that the Canadian economy is firing on all cylinders (not sure if it's two or eight...) is that it is all dependent upon the fantastic growth in our largest trading partner: the US. And critical analysis shows how dysfunctional that storyline is.

pitz's picture

I don't know of anyone in Canada who thinks Canada's economy is firing on all cylinders.  Real unemployment seems horrifically high, and there are no wage increases to be had.  Jobs in the STEM sector are scarce, which would seem to be a prerequisite to growth.  I think Poloz unfortunately is relying on bad data or is simply trying to placate his political masters.  In fact the data showed that rate cuts were more significantly needed due to very weak inflation numbers and month-over-month deflation.

YCtheL's picture

now everyone is making money

Rock On Roger's picture

No mention of how much the rate increased. It went from .5% to .75%.


Whoopee Doopee.

nope-1004's picture

Exactly.  The headlines are all about fashion with zero substance.


Bay of Pigs's picture

I'm sure raising rates will do wonders for the massive twin housing and consumer debt bubbles they have.

LawsofPhysics's picture

Yes, it's all bullshit to maintain power and control.

Same as it ever was...

"Full Faith and Credit"

asteroids's picture

The carefully ramping of the Loonie is to burn the FX shorts. You really think the Canadian economy is as strong as Central Banksters lead you to believe?

Village-idiot's picture

Living out here in rural Alberta I can assure you the economy is not strong, and socialist governments In Alberta, and now BC, aren't helping.

Adullam's picture

Right on. But someone whose world ends with Toronto city limits will have a hard time understanding that.

2_legs_bahhhhhd's picture

I've said all along, by lowering rates to zero, the central banks were laying out a gigantic net baited with cheap currency, once the net was full they would slowly close the net by raising rates.

Presto, once you run out of buyers, the Ponzi collapses, and the banks harvest the catch.

JuliaS's picture

Soon we'll all be like Japan, increasing and lowering rates by moving the decimal point left and right. Waaaay right.

Max Damage's picture

How pathetic has it become when rates are rising from0.5% to 0.75%. the world has been completely fucked with a see of bankers debt

Toonces McGraw's picture

Just robbing Peter, Peters children and his grand children to pay Paul. When an economy is overheating they are supposed to raise rates I guess. Even if the economy is just a can of beans on an open fire. Curious to know if things are booming in Eastern Canada, because out west it's still not too rosy.

walküre's picture

.75 from .5 is a 50% increase

makes a difference on yuuge loans

Vinividivinci's picture

And this helps me, how, exactly?

peterk's picture

It may have been a .25%  rise, but  thats gonna be  alot of $$$ for  someone on a $1000000 mortgage.

Here in AUstralia they have been raising rates for investor  interest only home loas out of step with the  RBA

, its a clear sign of  a CREDIT CRUNCH, but its the worst kind of credit crunch.

Some ties you get a credit crunch due to  excess demand for money like a  booming economy,... here its due to the BANKS needing more of a return on their  loans to pay for their BAD performing hidden loans. THis is a longer term  depressive  situation , the rise in rates  leads to  MORE  BAD debts  =  hard landing =  asset price collapses.

The banks are forcing   the central bankers to raise rates, yellen can talk all she wants too in a dovish way.. its not up to here  any more


Sages wife's picture

If you need a million dollar mortgage you're in the wrong house. A RBC banker told me 10 years ago that if rates go up 1.5%, half of her mortgage holders will drop off their keys; and that's in Edmonton; BEFORE the oil and gas meltdown. The real house here is one of cards, and the winds are picking up.

robertocarlos's picture

Crazy how the banks allow interest only repayment of a HELOC.

bluskyes's picture

Perhaps Kanada's liberal government needs the divend payments from the Bank of Canada to keep financing it's ever-balooning debt.

Albertarocks's picture

It's spelled "Canada"... with a "C".  And you left out quite a few letters when you tried to spell "dividend".  You might want to brush up a bit so you don't come out looking like a complete jerk.

Just saying.

bluskyes's picture

Never used a shitty touch-screen before, Eh?

Village-idiot's picture

Kind of a long-winded article saying very little.

The most important piece of information is missing. I read it twice looking for that little, seemingly unimportant item.

What is the interest rate? What was it? What is it now?

sudzee's picture

Rate will come down by Oct as the economy dives. 10% swing higher in the currency of its largest partner along with trade tarrifs will spell lots of trouble ahead. 

pitz's picture

Big problem here is that Canada is facing significant deflation as the housing bubble pops, and little else rises to take its place.  The Bank of Canada should have been, based on the most recent numbers, lowering rates and adding stimulus.  Raising rates here is insane and is not supported by the available data.    The economy was already in month over month consumer price deflation, and that was before the Canadian dollar rose ~8-10% against the USD$, and oil prices crashed another 10%. 


The CAD$ yield curve is trending dangerously close to inversion, and real unemployment is horrificially high. 

ceilidh_trail's picture

Of course this happens a few weeks before I am headed up there...