Why is the Canadian dollar rising, and when should I buy? Canadians across the country are asking these questions, so we decided to provide the answers.
Why is the Canadian dollar rising?
Earlier this week, on Wednesday July 12, the Bank of Canada hiked interest rates up from 0.5% to 0.75%. The move sent the loonie roaring by almost a cent. It was the first rate increase was the first since 2010 and shows that the Bank of Canada has confidence in the Canadian economy.
On Tuesday the Canadian dollar was trading at an average of about 77.40 US cents. The next day, following the Bank’s announcement, the CAD rose to 78.70 US cents. To find the last time the exchange rate from CAD to USD was above 78 cents you’d have to go all the back to August of 2016.
The Bank of Canada’s move was widely anticipated, but Bank of Canada governor Stephen Poloz’s high level of confidence came as something of a surprise. Many commentators had expected a much more cautious tone. Poloz described the rise as “a symptom” of a growing economy which is expected to be back in full swing by the end of the year. He expressed full confidence that the Canadian economy has “turned the corner” referencing a number of false starts over the last two years, most notably the 2014 oil crash.
Oil prices, which began to tumble in 2014 played a major role in the Canadian dollar’s reduced value, but the bank now has confidence that “adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding.”
After the announcement the bank’s governing council released a statement which explained that “growth is broadening across industries and regions and therefore becoming more sustainable.”
Outlook Going Forward
Canada enjoyed annualised growth of 3.5% in the first quarter of 2017. Although the bank expects this strong growth to fade, the outlook for the year still looks very positive. They recently revised their 2017 growth outlook from 2.6% to 2.8% since it the last forecast back in April. Growth is expected to fall to 2% in 2018 and 1.6% in 2019.
Canada’s inflation rate is projected to average just under 2% per year over the next two years. According to the bank it will then increase to 2.1% by 2019. Typically bankers raise rates to calm inflation, but with the figures currently well below the 2% target, some have questioned whether it was the right time to raise rates. Poloz explained to reporters after the announcement that “Reacting only to the latest inflation data would be akin to driving while looking in the rear-view mirror.”
The Bank of Canada’s American counterpart, the Federal Reserve, also contributed to the Canadian dollar’s rise. Fed Chair Janet Yellen hinted on Wednesday that they may not raise rates as quickly as some have predicted. Higher rates lead to a stronger currency, so the comments may have encouraged greater investment in CAD.
These positive statements have tipped the odds in favour of another rate hike before the year’s end. Analysts believe there is now a 70% chance of a rate rise before 2018, up from about 50% before the announcement. The Bank’s next rate announcement comes on September 6th, and the next quarterly forecast will arrive in October.
Should I exchange my CAD now or wait?
Although the markets expect rates to rise again before 2018, you may want to take advantage of the recent surge. A Continental Currency Exchange representative said, “We have seen demand for the Canadian dollar skyrocket since Wednesday’s announcement. Canadians have been waiting for this recovery for a long time.”
The markets may have already priced in the next interest rate rise into the value of the CAD. If the Bank of Canada does raise rates in September, don’t expect the CAD to jump quite so dramatically. On the other hand, if they decide not to raise rates then expect the CAD to drop quickly. Poloz explained that future decisions will be “highly data-dependent” and that “monetary policy is not on a predetermined path.”
Another Continental representative said, “Although the outlook for the loonie is strong, you never know what might happen. It is not surprising many people are exchanging now. Anything can happen when it comes to foreign exchange. Just look at how the GBP reacted to Brexit last year, or the decline of the CAD since 2014.”
Interest rates and the housing market
Rock bottom interest rates have made borrowing money cheap for Canadians. This has contributed to: Canadians taking out more mortgages, higher house prices, and a booming construction industry. Higher rates could cool the housing sector which will come as a relief to prospective home buyers and renters. Mortgage lenders and the construction industry will be watching closely. Higher rates may lead to decreased demand for new homes.
In general lower rates lead to more debt-fuelled spending. Raising rates can help curb this behaviour before it turns into a threat to economic stability. Overall the rate increase should make the Canadian economy healthier and the Canadian dollar stronger.
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