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

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.