Skip to main content

Briefing highlights

  • Canadian dollar sinks fast after hike
  • Loonie at about 80-cent mark
  • Bank of Canada raises key rate
  • Central bank warns of NAFTA risks
  • Markets at a glance
  • What to watch for today
  • Goldman, Bank of America hit by tax charges
  • Bitcoin tumbles to $10,000
  • Rabbi sues Quebec regulator

Loonie sinks fast

The Canadian dollar tumbled fast in the wake of the Bank of Canada's "dovish" interest rate hike and uncertain outlook.

"The BoC delivered the hike, but the price action reflects the mixed message," said Mark McCormick, North American head of foreign exchange strategy at TD Securities.

"The market likes the dovish hike narrative as the bank noted a few offsetting points," Mr. McCormick added.

"For one, the hike itself reflects strong data, the improvement of domestic prices and the closing of the output gap," he added.

"It shows that more hikes are in the pipeline. However, it waters this down a bit with some cautious language around the risks to NAFTA and some possible lingering slack in the economy."

The loonie, which had been as high as almost 80.7 cents (U.S.) earlier in the day, sank to just below 80 cents at one point, steadying at about 80.63 cents by midday.

As The Globe and Mail's Barrie McKenna reports, Bank of Canada governor Stephen Poloz, senior deputy Carolyn Wilkins and their policy-making colleagues raised the benchmark overnight rate by one-quarter of a percentage point to 1.25 per cent, the third in a string of increases.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

But they warned at the same time about the risks from troubled negotiations to remake the North American free-trade agreement, and pegged economic growth at 2.2 per cent this year, and 1.6 per cent next, well down from the estimated 3 per cent of 2017.

"Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more," the central bank said in its policy statement.

"The bank's outlook takes into account a small benefit to Canada's economy from stronger U.S. demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the bank has incorporated into its projection additional negative judgment on business investment and trade."

The prominence given to the NAFTA uncertainties in the statement "colours it to a significant degree, and it helps the bank push back against a market that is being too aggressive in pricing for the Bank of Canada for this rate hike cycle," said Bipan Rai, executive director of macro strategy at CIBC World Markets.

Economists have projected up to three rate increases this year.

"Improved optimism on business sentiment and exports suggests that the bank remains confident in the Canadian economy enough to warrant further removal of stimulus, but at a more gradual pace," Mr. Rai said.

"That suggests that [Canadian dollar] bulls should relax a bit here and the loonie should see some downside against currencies that we project to perform well this year, including [the euro and the yen].

Mr. McCormick, too, expects a weaker loonie, still.

"On net, we highlighted that USDCAD would be a buy on dips given the lingering NAFTA risks and potential for the market to start to push back on the three hikes priced in for this year," he said, referring to the U.S. versus Canadian dollar by their symbols.

"Again, our positioning and valuation models favor more upside in USDCAD, increasing scope for a push towards 1.26 where we would look to start fading rallies," he added, meaning a loonie at below 79.5 cents.

Read more

Markets at a glance

Read more


What to watch for today

Also on tap is the release of the Federal Reserve’s Beige Book of regional economic conditions.

“The Fed’s regional report will reflect a merry holiday shopping season, an upswing in business spending, and strengthening manufacturing and housing sectors,” said BMO senior economist Sal Guatieri.

“Respondents should express more optimism following the passage of tax reform legislation,” he added.

“On the downside, the report will likely confirm that worker shortages are spreading to more industries and regions. The last report (issued in late November) said employers were raising wages and non-wage benefits to retain and attract workers, a likely precursor of price hikes.”


More news

Streetwise

Insight

Inside the Market

In case you missed it