Loonie soars after bank Of Canada unexpectedly hikes rates By 25 bps

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With only 6 of 33 forecasters predicting a rate hike in today’s Bank of Canada announcement, it was inevitable: the Bank of Canada surprised a good 75% of the market, and triggered massive stop loss orders in the looni, when moments ago it announced it hiked rates by 25bps to 1%, sending the USDCAD lower by nearly 300 pips…

FX traders will be interested to note that the 5 year trend-line from the 2012 lows is at 1.2326, so a sustained break under would quickly open the way for a move to 1.20 and maybe as low as 1.1920, the May of 2015 bottom.

A quick look at the BOC statement reveals that according to Poloz, “removal of some of the considerable monetary policy stimulus in place is warranted” given stronger than expected economic performance while adding that “future monetary policy decisions are not predetermined” and will be guided by economic data and financial-market developments as they “inform the outlook for inflation.”

The Central bank also said that “close attention will be paid to the sensitivity of the economy to higher interest rates” given elevated household indebtedness. The bank will give particular focus to evolution of economy’s potential and labour market conditions, while highlighting that inflation remains below 2% but has evolved “largely as expected” since July MPR.

In the statement the central bank also highlighted that “excess capacity remains in labour market, wage and price pressures more subdued than historical relationships suggest” while “geopolitical risks and uncertainties around international trade and fiscal policies remain.”

Some analysts have highlighted that in the statement’s forward guidance, the central bank removed its inflation outlook, and replaced it with an outlook on potential output and the labor market.

Finally, the bank expects moderation of pace of economic growth in 2H 2017, but GDP level higher than expected in July MPR.

The full statement is below:

The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.

The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canada’s economy.

While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.

Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted. Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions. Furthermore, given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.

The question now, of course, is with Canadian interest rates continuing to rise, what happens next to what many have dubbed the biggest housing bubble in the world?

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