The Pound to Canadian Dollar exchange rate surged higher by just over a cent to a fresh 3.5-year high of 1.6815 yesterday afternoon as comments from the Bank of Canada threw cold water over hopes that interest rates could be raised in the near future.
After a year-and-a-half of hinting that it was moving towards a “gradual normalisation” of interest rates – considering a rate hike in lemans terms – the Canadian Central Bank decided that economic conditions are too weak for monetary tightening.
The Bank of Canada cut its domestic growth projections for 2013 from 1.8% to 1.6%, and cut its 2014 forecasts to 2.3% from 2.7%.
The BoC also downgraded its predictions for US growth from 1.7% to 1.5% in 2013 and from 3.1% to 2.5% in 2014.
The recent debt ceiling deadlock is likely to have proved crucial in the Canadian Central Bank’s calculations, as reduced American output almost always translates into softer economic growth north of the border in Canada.
The BoC also mentioned that it was concerned with the stubbornly low rate of inflation, which has remained below the optimum 2.0% target since mid-2012. Interest rate hikes make credit more expensive to investors and consumers alike, which usually has the consequence of making the money supply shrink and inflation fall. For this reason, the BoC decided that monetary tightening is not sagacious at this juncture.
Interest rate hikes also have the ability to drive yield curves higher, which in turn leads to greater profits for investors. With a rate rise off the table, speculative investors opted to sell the ‘Loonie’ as the potential for profit softened.
Earlier in the morning the Bank of England released its Minutes report from the October meeting, showing that policymakers voted unanimously 9-0 against any further monetary tightening. The rest of the report struck a neutral-positive tone as the MPC commented that a strong British Pound would help to insulate consumers’ wealth from the eroding effect of persistently overshooting inflation. This mild allusion to a potential rate hike in the future spurred investors as did the BoE’s decision to raise its growth projections for the second half of the year to 2.0%.
Essentially, the Pound is benefitting from Britain’s stubbornly high Consumer Price Index (2.7%), whilst the Canadian Dollar is bearing the brunt of a softer inflationary outlook (1.1%).
The commodity-correlated ‘Loonie’ was also impacted by a drop in global risk sentiment, which was brought about by some concerning news out of China that the People’s Bank of China is halting its liquidity-boosting stimulus programme.
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