The Canadian dollar jumped on Wednesday following a surprisingly hawkish statement from the Bank of Canada.
USD/CAD, which had been trading at levels above 1.3, fell sharply in the two hours following the BoC’s monthly meeting to 1.2835, at which it still trades at the time of this report (17:00 Singapore, GMT +8). The Canadian dollar’s 1.3 percent gain against its US counterpart marked its best day in ten weeks.
At its meeting, the BoC held interest rates steady at 1.25 percent for the third consecutive month, as widely expected, but the bank’s upbeat attitude towards inflation and economic growth were unexpected given the prevailing uncertainty over the renegotiation of NAFTA.
“[Economic] activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast and data on imports of machinery and equipment suggest continued recovery in investment. Going forward, solid labour income growth supports the expectation that housing activity will pick up…in 2018,” said the BoC’s statement.
On inflation, this “will likely be a bit higher in the near term than forecast in April.”
In recent months, the BoC has sought to balance strength in the economy with concerns over household debt and the future of NAFTA, and has done this amid the early stages of what might become a global trade war (on Tuesday, Washington announced it would proceed with its proposed 25 percent tariff on $50 billion worth of Chinese goods).
Among the big banks, most in sync with the Canadian dollar appears to be Goldman Sachs, and this should please holders of the currency because ahead of the BoC meeting the bank argued in a note that “limited spare capacity and on-target inflation…[make] the currency undervalued.” GS analysts went on to forecast USD/CAD at 1.18 in twelve months’ time.