Canada’s central bank shocks FX markets with a surprise 0.25% interest rate rise, Loonie surges versus all peers

Sep 7 • Morning Roll Call • 1412 Views • Comments Off on Canada’s central bank shocks FX markets with a surprise 0.25% interest rate rise, Loonie surges versus all peers

Over recent days (and weeks), the financial news narrative has been dominated by a combination of the tropical storm Harvey, the impending storms of Katia, Jose and Irma and the continuous geo political tensions between the USA administration and North Korea. Therefore (in certain ways) it was refreshing that investor news on Wednesday was dominated by the Bank of Canada surprising the markets by raising Canada’s interest rate by 0.25% to 1%. In the accompanying statement shortly after the announcement, the central bank delivered its reasons for the rise, including: inflation being under control, a stable and increased employment outlook, house price inflation beginning to moderate in key cities, GDP reaching a healthy level in the first two quarters of 2017 etc.

In short the central bank felt sufficient conviction, based upon the hard economic data, that the country’s economy was more than able to absorb such a modest interest rate rise. The effect on the value of the loonie (the nickname given to the Canadian dollar), was immediate; USD/CAD crashing by circa 1.5% through S3, to end the day at approx. 1.2225, after collapsing to an intraday low of 1.2135. Similar gains were witnessed in the Cad dollar versus all of its main peers on Wednesday.

Continuing the theme of pure economic news dominating the Western Hemisphere’s economic landscape, the USA’s issue over the country’s ever increasing debt and the current legal ceiling, was finally solved during Wednesday’s trading sessions, as U.S. lawmakers in congress agreed to extend the debt’s ceiling until the year’s end. Meanwhile, a highly respected member of the Federal Reserve’s committee, Stanley Fischer, suddenly tended his resignation. Often tipped as a likely successor to Janet Yellen, his resignation was notable, but failed to directly effect USA equity markets, or the dollar’s value. Further positive news concerning the USA was delivered in the form of the country’s trade balance, which beat the economists’ forecast, as it reduced to -$43.7 for the month of July.

However, not all USA data was positive on the day; the ISM non manufacturing PMI came in below various predictions at 55.3 and the Markit services PMI for the USA came in at 56 for August, missing the forecast. The DJIA closed up 0.25%, SPX up 0.31%, WTI oil rose to R1 and by circa 0.9% to $49.40 per barrel, whilst gold gave back some of the recent gains generated through its safe haven appeal, falling by approx. 0.4% on the day, to $1334 per ounce, from an intraday high of $1342. USD/JPY rose by circa 0.5% during the day’s trading sessions to 109.31. EUR/USD fell by circa 0.4% on Wednesday to 1.1918, whilst GBP/USD was effectively flat on the day at 1.3038.

European economic news and data releases centred firstly on Germany’s factory orders subsiding; coming in down -0.7% in July, versus the forecast of 0.2% and the growth of 1% registered in June. Thereafter, several PMIs, for both Germany and the Eurozone as a single bloc, came in mostly close to the forecasts.

Significant economic calendar events for September 7th, all times quoted are London (GMT) time.

06:00, currency impacted EUR. German Industrial Production n.s.a. and w.d.a. (YoY) (JUL). The forecast is for a rise to 4.6%, from the 2.4% reading recorded for June.

09:00, currency impacted EUR. Euro-Zone Gross Domestic Product s.a. (YoY) (2Q F). The prediction is for GDP growth to be maintained at 2.2% in the second quarter.

11:45, currency impacted EUR. European Central Bank Rate Decision (SEP 07). The expectation, from economists polled by Bloomberg and Reuters, is for the current 0.00% rate to remain unchanged.

11:45, currency impacted EUR. ECB Asset Purchase Target (SEP). There is little anticipation for the asset purchase scheme to be tapered, from its current monthly rate of EU60b.

12:30, currency impacted CAD. Building Permits (MoM) (JUL). The forecast is for a fall to -1.0%, from the 2.5% registered in June.

12:30, currency impacted USD. Initial Jobless Claims (SEP 02). The prediction is for an increase to 242k, from the 236k figure revealed in the previous week.

12:30, currency impacted USD. Continuing Claims (AUG 26). The expectation is for an increase to 1945k, from the 1942k registered in the previous week.

15:00, currency impacted USD. DOE U.S. Crude Oil Inventories (SEP 01). Analysts will be carefully monitoring this figure, given the disruption to oil supplies in the USA, as a consequence of tropical storm Harvey.

23:50, currency impacted JPY. Gross Domestic Product annualised (2Q F). The forecast is that Japan’s GDP growth will have receded to 2.9%, from the 4.0% registered in Q1.

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