The Canadian dollar touched its highest level in three months after the central bank kept borrowing rates unchanged, pointing to signs damage from an oil-price shock may already be fading and manufacturing exports picking up.
The loonie rose more than 1 cent on Wednesday, April 15, and now buys 81.3 U.S. cents.
The currency gained against all its major peers as the overnight lending rate was kept at 0.75 percent for a second straight meeting, after a surprise cut in January. In its monetary policy report, the Bank of Canada said the economy is responding to the stimulus it added to cushion Canada’s economy from the fall in oil, its largest export, and forecast faster growth later in the year.
“For the Bank of Canada, it comes down to the fact they’re a little more optimistic on the economy than markets are,” Bipan Rai, director of foreign-exchange strategy at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto. “The market is starting to come a little more in line with what the Bank of Canada’s own expectations for domestic growth are this year.”
Bank of Canada Governor Stephen Poloz cut his growth forecast for the first three months of the year to zero while raising projections for the following two quarterly periods, saying the damage from the oil price was playing out faster than expected and setting the economy up for a rebound. He also brought forward a projection for when inflation will return to its 2 percent target to the first quarter of 2016, from the final three months of next year.
Poloz also predicted Canada would benefit from stronger growth in the U.S., its largest trading partner, after a disappointing first quarter.
The yield advantage benchmark U.S. government two-year notes enjoyed over their Canadian peers since January disappeared Tuesday after a string of better than expected data releases in Canada contrasted with worse than expected data south of the border. Two-year securities are closely tied to investors’ expectations for the direction of a country’s interest rates.
“He’s coming across as optimistic, and that’s certainly the tone the market is going with,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto. “The market is obviously looking at a central bank that is very reluctant to cut rates again.”