CAD Soars on Hawkish BoC Comments

The Bank of Canada backed off their pledge to leave interest rates unchanged until June, sending the Canadian dollar sharply higher. In our preview to the rate announcement, we said stronger economic data could encourage more optimistic comments from the BoC but their statement was even more hawkish than we had anticipated. Having only lowered their growth and inflation forecasts in January, the BoC has acknowledged that inflation and output was stronger than forecasted. Therefore if inflation continues to rise, the central bank may have to raise interest rates before June. Having dropped the reference to having flexibility at low rates and dropping their comment that inflation risks are tilted to the downside, the BoC is now walking not crawling towards the exit.

Although the BoC is still worried that a strong currency and weaker U.S. demand could slow growth and they reiterated that interest rates are expected to remain at 0.25 percent through June, they openly admitted that they could raise rates sooner if needed.

There is a laundry list of reasons why the BoC grew more hawkish. With a healthy labor market, stronger GDP growth, higher inflationary pressures, an expanding manufacturing sector, a hot housing market and elevated oil prices, the economy is doing alot better than the central bank is leading everyone to believe. Nonetheless, Canada knows that they are very sensitive to U.S. growth and until the U.S. economy has returned to consistent job growth, the BoC will refrain from appearing overly optimistic. We still expect the hawkishness of BoC to fuel further gains in the CAD. Over the next few trading days, USD/CAD could test its yearly low of 1.0225.

Meanwhile the lack of U.S. economic data has created a lack of cohesive price action in the dollar this morning. The greenback traded lower against the euro, Australian dollar, and Swiss Franc and higher against the British pound, Japanese Yen and New Zealand dollar. The EUR/USD fell to a fresh yearly low during the early European trading session but has recovered significantly since then. Greece's problems remain in the background, traders are chattering about the IMF's report on Chinese Yuan undervaluation, political developments in the U.K. and Australia's rate hike. Too much is going on right now for the dollar take control of the markets.