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Bank of Canada Surprises with Rate Hike, Canadian Dollar Rallies

Bank of Canada Surprises with Rate Hike, Canadian Dollar Rallies

Dylan Jusino, Contributor


Talking Points:

- The Bank of Canada raised the overnight lending rate to 1.00% from the previous 0.75%

- BoC provides few details about the rate decision as no monetary policy report is published

- Loonie surges as the central bank starts a course of normalization that few other currencies can claim

See our longer-term forecasts for the US Dollar, Euro, British Pound and more with the DailyFX Trading Guides

The Bank of Canaada (BoC) unexpecetedly raised its benchmark lending rate for the second consecutive meeting this morning. The target for the overnight rate now stands at 1.00% - an 25 basis point increase from 0.75%. The Bank Rate was lifted to 1.25% from 1.00% and the deposit rate is now 0.75% having been lifted from 0.50%. Given that overnight swaps had only afforded a 44 percent probability that the central bank would move at today’s meeting, the Canadian Dollar responded with an abrupt rally as its yield advantage leveraged the general appetite for return and risk appetite.

Canadian Economy

In its accompanying statement, the central bank stated its decision was supported by the bank’s view that Canada is “becoming more broadly-based and self-sustaining.” The bank further noted that, “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.”

The bank further saw that adjustments in tax and housing finance policies provided a much needed cooling to the housing market.

Less than a week ago Canada saw its fastest pace of quarterly economic growth since September 2011. Second quarter gross domestic product came in at 4.5% versus analysts’ estimates at 3.7%.

The BOC acknowledged that inflation is still below their 2%. But they did not provide an outlook on inflation for the remainder of the year.

The Canadian Dollar

USD/CAD dove as much as 2.2 percent following the announcement and further into two-year lows. With this further extension, the pair has dropped as much as 12 percent from its highs back in May. The surge for the Canadian Currency was not isolated to this particular pair. The Loonie managed sizable gains against all of its counterparts.

What to Look For Next

The central bank left its path moving forward somewhat vague with some concerns surrounding wage growth and market unknowns. The bank ended with, “given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates.”

Unfortunately, the central bank did not release a monetary policy report which is consistent with their quarterly release at every other interest rate announcements. Looking ahead, BOC will hold two more meetings this year, one on October 25th and the other the final one Deceomber 6th. For a full list of the meetings in 2018 see BOC’s interest meeting schedule.

Here are a few prints that have been weighing on the Canadian Dollar this morning:

- CAD Labor Productivity (QoQ) (2Q): -0.1% from 1.3% previously.

- CAD International Merchandise Trade (Canadian dollar) (JUL): -3.04b versus -3.30b expected, from -3.76b (revised lower from -3.60b).

- CAD Bank of Canada Rate Decision (SEP 06): 1.00% versus 0.75% expected, from 0.75% as previously.

See the DailyFX economic calendar for Wednesday, September 6, 2017

Chart 1: USDCAD 15-Min Chart (September 6, 2017 Intraday)

This is one of the most intense, intraday moves USD/CAD has experienced this year. On a higher time frame (Daily chart), we find that this pair is now trading at lows last seen in June 2015.

--- Written by Dylan Jusino, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.