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Jan 16, 2018

Loonie flat as investors brace for Bank of Canada rate hike

NAFTA the 'wild card' for Canadian dollar as TD predicts two rate hikes in 2018

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The Canadian dollar was little changed against its U.S. counterpart on Tuesday as investors braced for an expected interest rate hike from the Bank of Canada on Wednesday.

At 4 p.m. EST, the Canadian dollar was trading at $1.2434 to the greenback, or 80.42 U.S. cents, barely weaker than its Monday close. It traded in a tight range during the session, but did touch its strongest level in more than a week at $1.2397.

While the market is pricing in a more than 90 percent chance that the central bank goes ahead with another hike after moving rates up twice in 2017, the currency may also need a more aggressive monetary policy outlook to strengthen much from here.

"The Canadian dollar is perfectly priced for a hike, but regardless of whatever the decision is, it's still really important to get a sense of how they characterize the path for the rest of the year," said Eric Theoret, a currency strategist at Scotiabank.

Scotia outlined four possible outcomes in a note on Tuesday, saying a "neutral hold" in which the timing of future rate hikes are uncertain would be a worst case scenario for the loonie, potentially pushing it to as weak as $1.29 to the greenback.

A "hawkish hold" would be modestly negative and a "neutral hike" modestly positive, while a "hawkish hike" could push it to $1.23 in a hurry, the note said.

"It's really going to be the labor piece that is most critical," Theoret said, referring to how the bank might alter language from December about "ongoing­ – albeit diminishing – slack in the labor market."

The Bank of Canada raised interest rates in July for the first time in seven years and then again in September. Its benchmark rate sits at 1 percent.

One major uncertainty that may weigh on the bank's Wednesday decision is the fate of the North American Free Trade Agreement. A sixth round of talks to renegotiation the trade deal is due to place in Montreal from Jan. 23 to 28.

Canadian government bond prices were mixed across the yield curve, with the two-year down half a cent to yield 1.778 per cent and the 10-year rising 12 cents to yield 2.175 per cent.

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