Canada Dollar Reaches One-Week High as BOC Sees Economic Rebound

  • Central bank matches projections by holding benchmark target
  • Futures show reduced likelihood of a policy-rate cut in 2016

The Canadian dollar rose to a one-week high after the Bank of Canada held its benchmark interest rate unchanged and downplayed the impact of the U.K. vote to leave the European Union and weaker U.S. demand, saying an export-led rebound is coming.

The implied odds of a Canadian rate cut by year-end fell to 16 percent from 31 percent before the announcement, according to futures data compiled by Bloomberg. All 27 economists surveyed by Bloomberg predicted the central bank would keep the benchmark interest rate at 0.5 percent.

"The Bank of Canada sounded cautiously optimistic about the Canadian economy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Providence. "The market likes this statement and it’s showing as the loonie’s up near session highs against the dollar."

The nation’s economic prospects got a boost after U.S. payrolls data released last week suggested that the economy of Canada’s largest trading partner is in better shape than counterparts in Europe and Asia. Canada’s Group of Seven peers, including the Bank of England and the European Central Bank, are looking to introduce more easing measures to shield their economies from further fallout from the Brexit vote.

The Canadian dollar rose 0.4 percent C$1.2987 per dollar at 10:41 a.m. in Toronto. It weakened as much as 0.3 percent. The loonie is the third-best performing currency among its developed peers this year behind the yen and the New Zealand dollar.

Canada’s 10-year bond pared gains, with the yield falling four basis points, or 0.04 percentage point, to 1.02 percent, after dropping as much as seven basis points.

Economic Outlook

The nation’s economy will return to full output “towards the end of 2017,” the central bank said, a little later than the April prediction for the second half of next year.

“The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty,” policy makers led by Governor Stephen Poloz said in a statement.

Hedge funds and other large speculators raised their net bullish position on the Canadian dollar to 11,517 contracts as of July 5, according to data from the Commodity Futures Trading Commission. The loonie is expected to end the year at C$1.32, according to the median of 49 forecasts compiled by Bloomberg.

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