The Canadian dollar broke the 81-cent (U.S.) indicate on Friday for the first time since 2015, continuing its current surge on the strength of the nation’s hot market, compared to lacklustre job-growth figures in america.
Data released on Thursday revealed the Canadian market growing at a breakneck 4.5 percent from the second quarter, the most powerful posting since 2011.
Meanwhile, on Friday that the U.S Bureau of Labor Statistics released a report showing 156,000 jobs were added to the U.S. market in August, significantly below expectations of approximately 200,000.
Both reports have shifted expectations regarding central-bank coverage in both nations. Some analysts now expect the Bank of Canada to raise its benchmark overnight interest rate by 25 basis points as early as next week. This type of hike, which will be the second this season, would place the rate of interest at 1 percent, up from 0.75 per cent set in July. If the Bank of Canada does not move next week, most analysts expect a rate increase later this year.
In america, on the other hand, the Federal Reserve could be rethinking another rate increase this year, after the worse-than-expected project numbers.
Canada’s strong performance relative to the United States is driving up demand for the loonie — as investors bet on higher prices in Canada. After surging above 81 cents on Friday, the Canadian dollar settled back to about 80.71 cents, up almost per cent daily.
“Nudging interest rates a quarter point higher is obviously justified after a scorching first half” of economic growth, Avery Shenfeld, managing director and chief economist of CIBC Capital Markets, wrote in a note on Friday. “However a further rise in the Canadian dollar is significantly less welcome.”
The Bank of Canada is currently in a tricky situation as it weighs the worries of many indebted buyers and consumers against the export industry, which rewards when the Canadian dollar is low.
“The central bank would like to shrink the slice of this growth pie coming from home and home debt, while maintaining the money at amounts that will sustain exports and related capital spending,” Mr. Shenfeld said.
The central bank could deal with the situation by raising rates in September, but making it very clear that there are a pause on additional gains, he said.
Alternatively it might push the statement back to October, which would “help signal to markets that hikes will be slow,” he said, restricting the rush Canadian dollars.
Derek Holt, head of Capital Markets Economics at Scotiabank, is gambling on a 25 basis point announcement next Wednesday, and ” a nod to the way there are further hikes to come beyond just unwinding the two 25 basis point reductions in 2015.”
“We think the central bank stays on the path toward raising its policy rate by about one full percentage point by the end of next year at a more front-loaded pair of movements–and probably more gains than priced in by economies through 2018,” Mr. Holt wrote in a note this week.
“One may quip that Canada has achieved US President Trump’s desire of 4 percent increase for his country,” he added.
Concern about driving up the value of the loonie with more aggresive monetary policy should not be overplayed. “Going forward we believe that global (including US) income growth impacts on Canadian exports can offset the deterioration in cost competitiveness,” Mr. Holt wrote.