Canadian Dollar Hits Five-Week High as Rate Decision Looms
Key Facts
The Canadian dollar rose 0.1% to 1.40 against the U.S. dollar on Friday, October 23, after reaching its strongest level since September 16 during the session at 1.3969, according to Reuters. The currency extended its weekly gains, heading for its largest weekly rise since April. The move came as investors awaited the Bank of Canada's interest rate decision the following week. Investors put the odds of a rate hike at about 80%. But that probability reflects market pricing, while the bank had not yet announced its decision.
Canadian retail sales data for August showed a monthly increase, but the reading came in slightly below analysts' expectations, according to Reuters. Analysts had expected sales to rebound after falling in July, but the increase recorded fell short of forecasts. Desjardins analyst Oscar St-Onge said resilient spending figures reinforced his view that the bank was headed for a rate hike. He added that the data pointed to expected gross domestic product growth of about 2% in the third quarter. In the analyst's reading, the spending figures therefore supported bets on tighter policy, despite coming in below market expectations.
In energy markets, U.S. crude futures rose 3.8% to $103.27 a barrel at Friday's settlement. Reuters linked the oil advance to concerns about supply disruptions following Houthi attacks in Saudi Arabia. Oil matters to the Canadian currency given the economy's ties to energy exports, and crude's rise coincided with gains in the Canadian dollar. However, Reuters linked rate-hike bets to spending data and comments from the central bank governor, not directly to the rise in oil. Canadian bond yields rose across maturities, tracking moves in U.S. Treasury yields.
The yield on Canada's 10-year bond rose 5.1 basis points to 3.838% on Friday. For the week, the Canadian dollar gained 1%, heading for its strongest weekly rise since April. Daily closing data for the U.S. dollar/Canadian dollar pair also show it falling from 1.41184 on October 18 to 1.40011 on October 23. These levels reflect a decline in the number of Canadian dollars needed to buy one U.S. dollar between the two closes. Market attention now turns to the Bank of Canada's meeting scheduled for October 28.
Most economists polled by Reuters expected the Bank of Canada to raise its key interest rate by 25 basis points to 2.50% at its next meeting. Reuters said investors had priced in odds of about 80% for the increase. This separates market expectations from the actual decision, which has not yet been issued. The bank is scheduled to announce its decision on October 28. That date remains the next milestone for investors after the currency's gains and the rise in bond yields over the week.