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    Canadian Economy Is Red Hot, Further Rate Hikes Likely to Boost CAD

    Updated: May 28, 2018  

    In stark contrast to the US dollar, which continues to suffer, the Canadian dollar is offering investors nothing but hope at present.

    The Canadian dollar was the best performing FX major in June and with only one trading day left of the month looks certain to take that crown again in July.

    Despite taking a breather on Thursday, the ‘loonie’ ended the week right back near its July highs after investors learned on Friday that Canadian GDP grew 0.6% in the month of May; a long way above the market forecast of 0.2% and above April’s GDP increase, also of 0.2%.

    Yesterday’s data meant that in the twelve months leading up to May, Canada’s economy grew by 4.6% – its strongest pace in seventeen years.

    With nearly 80% of Canadian exports going south of the border, understandably most Canadians are concerned with the value of their currency against the US dollar, and against the ‘greenback’ the Canadian dollar climbed almost a percent within thirty or so minutes of Friday’s simultaneous US-Canada GDP announcements.

    With US GDP coming in line with market expectations at an annualized rate of 2.6%, the Canadian dollar climbed to $0.804 (USD/CAD 1.2435), which keeps the exchange rate within a whisker of Wednesday’s two-year high of $0.806 (USD/CAD 1.2413).

    Readers should perhaps note that while an annual growth rate in excess of 4% appears very impressive, it can be considered flattering given the depressing effect on the economy that the Alberta wildfires had last spring, but even with that said, underlying growth in Canada is surely robust.

    Much of the aforementioned growth has been attributed to a mini-revival in the price of oil and gas, which both spent most of May rallying.

    Canada currently has the world’s third largest oil reserves and is the world’s fourth largest oil exporter, and for this reason is often labelled a ‘petro-currency’. For much of this year, the Canadian dollar followed the broad trends in the oil price. When crude fell 15% between early-March and early-May, the Canadian dollar weakened significantly. As oil then rallied for much of the rest of May, it recovered.

    Going forward, Canada’s economy should be further helped by a recent climb in WTI crude back above May’s closing price of $48.60 per barrel. Since June 21st crude has climbed $8 per barrel (nearly 20%) to the high $49s and is likely to threaten the major $50 level next week.

    Broad strength in the Canadian dollar began on June 12th when Bank of Canada Council member Carolyn Wilkins lit a fire under the currency 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 bank. Wilkins’ comments were the first to mark a significant change in the policy bias of central bankers in Canada, who earlier in 2017 were still suggesting that rate cuts were on the table.

    USD/CAD 3 Month Chart

    In a move expected by markets, the Bank of Canada raised interest rates to 0.75% at their meeting on July 12th. Following yesterday’s data, derivatives markets are indicating a 74% probability of the bank hiking another quarter-point in October.

    With interest rate expectations trumping all else when it comes to driving exchange rate direction, the Canadian dollar is likely to remain supported in the coming weeks.

    BestExchangeRates readers in need of Canadian currency this year can position themselves ahead of further CAD appreciation by getting their hands on some today. To delay is to risk the currency becoming even more expensive than it is now. Bear in mind that as recently as 2013 the Canadian dollar was at parity with the US dollar (25% higher than it is now) so it has plenty of room to increase in value.

    For better exchange rates than those available at the local bank or Bureau de Change, always use BestExchangeRates’ online comparison calculators for CAD travel money and CAD foreign currency transfers.

    Posted under: #News #CAD #USD

    Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors should not be taken as a reference to buy or sell any financial product.