The Canadian dollar gained 0.8% against USD yesterday and is now trading at its highest levels since early 2018. The move came as the Bank of Canada held rates and asset purchase programs steady but indicated a willingness to pare back stimulus as the recovery gains momentum. The willingness to explicitly address eventually tapering down the asset purchases (a sign of confidence in the economic recovery) was a surprise to some market participants and led to immediate gains for the Canadian currency. The gains in the Loonie were somewhat moderated by comments in the Monetary Policy Report which pointed to the strength of the Canadian dollar as possibly deflationary and a problem for policy makers. Tiff Macklem also pointed out that “most of the appreciation in the Canadian dollar is coming because of a broad-based depreciation of the U.S. dollar” and that “the exchange rate is becoming a factor in its own right in our projection.” So, there you have the Bank of Canada’s dilemma and the required balancing act in the next few months. On the one hand, the Bank of Canada is modestly optimistic about the Canadian economy and plans on paring down asset purchase programs but that would push the Canadian dollar up further which is something the Bank wants to avoid.
Account to Account