Loonie tops 81 cents US briefly again ahead of interest rate decision

The Canadian dollar shot up Tuesday to top 81 cents US briefly again, a day before the Bank of Canada unveils its latest decision on a key interest rate.

In morning foreign exchange trading, the loonie got as high as 81.05 cents US. It later fell back to trade at 80.81 cents US, up 0.3 of a cent.

Many market watchers believe it is not a matter of if but when the Canadian central bank hikes rates, especially after a strong report on GDP last week.

“With market-implied odds for a 25-basis point move set around the 55 per cent mark, the Canadian dollar is trading near levels not seen since mid-2015,” Karl Schamotta of Cambridge Market Payments said in a commentary.

“We have advanced our call for an additional 25 [basis point] tightening in the Overnight Rate to this week … but it would be fair to say that some (quite significant) doubts about the timing of a rate tightening remain,” Scotiabank said in a foreign exchange commentary, adding that many uncertainties remain in the market, such as the situation with North Korea, Brexit, and the NAFTA trade talks.

Royce Mendes, senior economist at CIBC Captial Markets, said it is a close decision whether the bank will tighten monetary policy Wednesday.

“This is not a slam dunk by any means,” Mendes told CBC News’ Meegan Read. “There’s very little difference in the bank adjusting rates either tomorrow or in October for the overall economy moving forward.”

“We think though, on balance, if the Bank of Canada is going to go in the next few months that tomorrow would be the easier route, given that they could then try to tamp down any further speculation of further rate hikes, and thereby cool down a little bit of the appreciation in the loonie,” he said.

Last week, the loonie broke through the 81-cents-US mark for the first time since 2015.

The U.S. dollar was weaker Tuesday against major currencies, such as the euro and the Japanese yen, following some dovish comments regarding inflation pressures by a Federal Reserve governor, Lael Brainard.

According to a report from Reuters, Brainard said the Fed could afford to be cautious on any upward move in U.S. interest rates because inflation there is “well short” of target.

Oil futures were also up. The October contract for light sweet crude setttled at $48.66 US a barrel, a gain of $1.37 a barrel on the day.

Equities retreat

Meanwile, stocks retreated sharply as investors weighed political developments on the Korean peninsula.

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,090.15, down 101.45 points.

In New York, the Dow Jones industrial average tumbled 234.25 points to end at 21,753.31, while the S&P 500 ended at 2,457.85, down 18.70 points. The Nasdaq composite index lost 59.76 points to settle at 6,375.57.

Source URL: http://www.cbc.ca/news/business/dollar-loonie-rate-hike-1.4275429