Canadian dollar surges amid hawkish stance of the Bank of Canada

Bank of Canada’s (BOC) interest rate hike has strengthened the Canadian dollar against the US greenback, making the loonie the only G10 currency to keep pace with the U.S. dollar

The Canadian dollar is expected to maintain this pace on the back of high commodity prices which bolster Canada’s economic outlook.

Canada’s currency has strengthened against the U.S. dollar to trade at 79.11 U.S. cents, indicative of 1.60% within a month. Canada’s currency has currently gained 0.11% within 24 hours against the dollar at the time of writing.

What you should know

• The Bank of Canada hiked its benchmark interest rate to 1.5% on Wednesday, signalling that there will be more hikes in the future. As it attempts to forcefully rein in excessive inflation, the central bank’s decision to hike its rate by half a percentage point was generally expected.
• The Bank stated that “The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”
• In the early days of the COVID-19 pandemic, Canada, like many other countries, decreased lending rates. However, those historically low borrowing rates have led to rising inflation, pushing the central bank to reverse course.
• Inflation continues to climb internationally and in Canada, owing mostly to higher energy and food prices. In April, CPI inflation in Canada hit 6.8%, significantly over the Bank’s prediction, and is expected to rise further in the near term before beginning to drop.
• The hike brings the bank’s rate within a quarter of a point of the 1.75% level it was at before the pandemic, and the bank made it clear in its statement that several more rate increases are planned.
• After borrowing significantly during the epidemic to participate in a hot property market, Canada’s economy could be particularly vulnerable to increasing interest rates.
• Nonetheless, the price of oil, one of Canada’s main exports, has risen by more than 50% since the beginning of the year due to supply disruptions caused by Western sanctions against Russia.