The Canadian dollar saw modest gains versus the US dollar Monday, with the USD/CAD climbing about 0.3 percent. These gains were due to higher oil prices and a more positive economic outlook following a BoC market survey. According to the second-quarter survey released by the Bank of Canada (BoC), market participants expect the Canadian gross domestic product to grow by 0.7%, as opposed to the 0.1% contraction expected in the BoC’s previous survey.
On Tuesday, the Canadian dollar initially weakened against the US dollar after Statistics Canada data showed Canada’s annual inflation rate dipped to 2.8 percent in June. This marked the lowest inflation rate in over two years, harking back to the times of masks and lockdowns. The lower-than-anticipated inflation number provides some breathing room for the Bank of Canada and increases the likelihood of maintaining interest rates at its next meeting in September. Lower interest rates can reduce the appeal of a currency like the CAD to foreign investors.
On Wednesday, the Bank of Canada (BoC) increased its benchmark rate to 5 percent, bringing the policy rate to a level not seen since April 2001. As we had previously mentioned and as astutely pointed out by BMO analysts, the Canadian dollar received an additional boost from today’s Bank of Canada interest rate announcement, as markets had not fully priced in a rate hike. The Canadian dollar is currently trading at 1.3186 against the US Dollar.
Here are some notable takeaways from the bank’s announcement today:
The stage is set for the Canadian dollar to potentially see some noticeable gains against the US dollar this week.
First and foremost is the Bank of Canada’s policy announcement scheduled for Wednesday. As discussed previously, there is a good case to be made for both a rate hike and a pause. Analysts are leaning slightly towards a 25 basis points (bps) increase. Given that it’s such a close call, if a hike does happen, the Canadian dollar could experience a larger than usual bounce since it’s not fully priced in by the markets.
