Photographer: Brent Lewin/Bloomberg

Canadian Dollar Surges as BOC's Poloz Adds to Hawkish Language

  • Loonie rises as Bank of Canada policy makers suggest rate hike
  • Pound gains as May tones down language, softer Brexit eyed

The Canadian dollar posted its biggest two-day gain in a year versus the greenback after Bank of Canada Governor Stephen Poloz said that rate cuts have done their job shielding the economy from shocks, though it’s too soon to plan a recovery party.

“The economy is gathering momentum, and not just in certain spots but across a much wider array,” Poloz told CBC Radio Tuesday, echoing similarly hawkish remarks from Deputy Governor Carolyn Wilkins that sent the loonie charging higher Monday afternoon. The move by the loonie was exacerbated by surging options volume and net-short positions near a record.

  • The Canadian dollar rose vs most of its G-10 peers while gaining for a fourth day against the USD, which dropped as much as 0.8% vs its northern counterpart. For just Monday and Tuesday, USD/CAD fell as much as 1.9%, the biggest two-day move since June 6, 2016. Loonie options transactions reported to the DTCC were about 300% above average Tuesday, and a majority of them were short-dated loonie calls with strike prices around 1.3200, close to its 1.3236 level as of 3:20 p.m. in New York
  • CAD buying was also evident against JPY as investors recalibrated their rate-hike expectations, said traders in Asian and London familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. With a large overhang of Canadian dollar shorts, the shift in expectations toward a BOC hike as early as October has driven a scramble to cover those positions, traders said
  • Elsewhere, the pound shrugged off election-related concerns to rebound strongly from post-election lows near 1.2630 seen Monday and Friday. Sterling rose after PM May took blame for election losses that left the Conservative Party with a minority government. Talk that the government may soften its Brexit stance, coupled with an above-estimate inflation reading and a signal from May that she will be more inclusive in her governing stance, contributed to a round of GBP short-covering that lifted the pound ~0.8% Tuesday, traders said
  • USD/JPY was holding close to 110.00 amid influence from large option strikes that rolled off Tuesday and with even larger strikes set to expire on Friday. The pair was earlier lifted by a brief rise in U.S. Treasury yields and also by the improved tone in U.S. stocks that saw the Dow Jones Industrial Average rise to a fresh record. USD/JPY is expected to find offers around 110.30/50 and technical resistance from 110.50 to 110.80, traders said
  • EUR/USD orbited 1.1200 Tuesday, trapped inside the 1.1185/1.1225 range as focus shifted to other currency pairs and as large 1.1200 option expiries provided an anchor
    • Unless CPI and retail sales numbers disappoint, the Fed meeting should be positive for the dollar, said Credit Agricole foreign-exchange strategist Vassili Serebriakov; sees EUR/USD trading closer to 1.1100 or 1.1150 by end of day Wednesday
  • Focus remains on Wednesday’s FOMC rate decision and press conference, where a rate hike is forecast. Fed Chair Yellen is expected to outline the central bank’s thinking on the trajectory of monetary policy as well as plans for winding down the Fed’s ~$4.5t balance sheet
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