Canada July Rate Hike Odds Jump After Poloz Restates Bias

Wednesday, June 28th, 2017

Theophilos Argitis and Maciej Onoszko
Canadian Real Estate Wealth

The Canadian dollar rallied to a four-month high and investors ramped up bets for a rate increase as early as next month after Bank of Canada Governor Stephen Poloz reiterated the central bank may be considering higher rates.

The nation’s currency jumped 1 percent to C$1.3072 per U.S. dollar at 11:01 a.m. in Toronto, the strongest level since February. The loonie traded at 76.5 U.S. cents. Swaps trading suggests investors are placing a 69 percent chance of a rate hike at the bank’s July 12 rate decision, up from 39 percent Tuesday.

“The Poloz comments buttress the change in tone that we’ve seen from the Bank over the past month,” said Bipan Rai, Toronto-based senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce. “There’s still some speculative shorts out there are being squeezed as a result.”

The Canadian dollar is the best performing Group-of-10 currency this month after the central bank unexpectedly adopted a tightening bias two weeks ago with suggestions that stimulus associated with two rate cuts in 2015 may need to be withdrawn. Poloz used similar language in an interview with CNBC.

“Rates are of course extraordinarily low,” Poloz said, adding the bank cut rates by 50 basis points in 2015 to counteract the effects of the oil price shock. “It does look as though those cuts have done their job,” he said, according to a transcript of the interview. “But we’re just approaching a new interest rate decision so I don’t want to prejudge. But certainly we need to be at least considering that whole situation now that the excess capacity is being used up steadily.”

Bank of Montreal is now calling for a rate increase in July as Poloz’s comments “were the final straw” prompting the shift, Benjamin Reitzes, Canadian rates and macro strategist at the bank, wrote in a note on Wednesday. The Bank of Canada’s hasn’t raised rates since 2010.

The comments from the central bank governor extended a sell-off in Canadian government debt. The two-year note fell for a third day, pushing the yield up to 1.04 percent, the highest since January 2015. The rate on 10-year securities added seven basis points to 1.64 percent, increasing 22 basis points this month, the steepest increase since November.
CIBC’s Rai doesn’t expect the bank to raise rates next month.

“The market is moving to price in 55-60 percent chance that the bank moves in July but the odds should be more skewed towards 30 percent,” he said. “It’s unlikely that the Bank of Canada will want to front-run second-quarter growth and strengthen the Canadian dollar further.”

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