Very early this morning in Asia, Bank of Canada (BOC) Council member Carolyn Wilkins lit a fire under the Canadian dollar with her remarks to an audience at the Asper School of Business in Winnipeg, in which she hinted at a possible rate hike by the BOC. Wilkins said that “as growth continues…the Governing Council will be assessing whether the considerable monetary policy stimulus presently in place is still required.”
Since the 2008/09 financial crisis, the Bank of Canada, like the central banks of most other advanced economies, has been forced to adopt an especially easy, or loose, monetary policy. The interest rate in Canada is currently at 0.5% – near to record lows – and rates have been at or below 1% since 2009. By comparison, between 1995 and 2009, rates in the country averaged 4%.
Wilkins’ comments reflect what may be a significant change in stance of central bankers in Canada, who earlier this year were still suggesting that rate cuts were on the table. The comments are perhaps the first acknowledgement by the BOC that the next move in rates will be up.
The central bank makes its next decision on interest rates on July 12th and derivatives markets are now pricing in something like a 55% probability of a BOC rate hike in 2017.
Economic growth in Canada has improved steadily since the fourth-quarter of 2015 in which annualized GDP growth fell to just 0.4%. The pace of GDP growth has quickened in four of the five quarters since then and now stands at a healthy 2.3%.
Reflecting renewed Canadian dollar strength, the exchange rate for USD/CAD fell almost 200 pips on Wilkins’ comments, from 1.3465 to 1.3276 – a fall of 1.4%.
The Canadian dollar of course made similar gains across the board this morning, not only versus USD.
One particularly interesting exchange rate is GBP/CAD, which has been well and truly hammered in recent days. Today’s fall in GBP/CAD from around 1.7030 to 1.6795 adds to losses from Friday of last week, a day on which the British pound was dumped by investors after they learned that voting in the UK general election had produced a hung parliament. Prior to the election, GBP/CAD had been trading above 1.75.
Against both the US dollar and the pound, the Canadian dollar is now at eight-week highs.
Hong Kong Dollar Still Falling, Breaches 7.8 versus USD
The fall of the Hong Kong dollar continues unabated.
Including this week, the currency has fallen in twelve of the past sixteen weeks and this morning the exchange rate for USD/HKD breached the psychologically important 7.8 level, that being the midpoint of the currency’s allowed range.
Although the Hong Kong dollar doesn’t move much – because it has been pegged to the US dollar since 1983 and has been limited to a USD/HKD range of 7.75 to 7.85 since 2005 – when it does move, investors take notice.
Today’s breach of 7.8 in USD/HKD is the first in sixteen months and in only three prior months since October 2011 has the exchange rate reached as high as it is today. In May, some analysts warned that a move to 7.8 could prompt selling of Hong Kong equities.
Throughout 2017, Hong Kong dollar weakness has been driven by an ever-widening interest rate gap between the US and Hong Kong.
Not helping matters today is US ratings agency Fitch, who posted a warning several hours ago on Hong Kong banks. The agency noted “asset-quality risk” on the back of data which showed that banks in the country had increased their loan exposure to China by 10% in the first quarter – a pace which Fitch believes may be too fast given that “China’s economy is highly leveraged and is going through a structural slowdown.”
Readers can use BestExchangeRates.com’s online comparison calculators for travel money and foreign currency transfers to change money at exchange rates far better than those available at your local bank or Bureau de Change.
Author: Joel Wright
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