Loonies strengthens as rates left unchanged

The Canadian dollar advanced against most commonly-traded currencies, after the Bank of Canada kept its benchmark interest rate unchanged and maintained the tightening bias from its last statement.

By mid-afternoon in New York, the USD/CAD was down 0.42% at 1.0490, after the Bank of Canada decided to leave its overnight rate at 1%, where it has been since September 2010. Although the decision was widely expected, the central bank noted in its statement that the housing market has been stronger than anticipate lately.

The statement kept the same language as used previously by Governor Stephen Poloz, saying ‘as long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.’

In other words, the Bank of Canada still intends to tighten eventually, but this is unlikely to be in the near future. This hawkish bias, as slight as it is, is probably acting to support the currency.

The Loonie also received a boost from the general ‘risk-on’ sentiment that has prevailed today. Data overnight showed that GDP growth has picked up pace in both Australia and China and that has fuelled demand for growth currencies, such as the Australian dollar and the Canadian dollar.

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