The Canadian dollar improved by over 1% yesterday against the pound after the Bank of Canada hiked interest rates as expected from 1.5% to 1.75%. This hawkish manoeuvre came about as the Central Bank wanted to counter rising inflation and dropped the previous rhetoric which suggested rates would increase gradually.
|Currency Pair||% Change in 30 days||Difference on £200,000|
As Canada trades so much with the US south of the border, it is important for Canada and the US to have a similar policy in terms of interest rates. With the US having hiked rates 9 times since December 2015, to me this hike came as no real surprise.
The Bank of Canada went on to claim that higher rates will need to continue in order to achieve the inflation target of 2%. Bank of Canada Governor Stephen Poloz stated that the ‘global economic outlook' remains solid.
The Canadian dollar has also seen recent signs of improvement against sterling with GBPCAD exchange rates having dropped by 3 cents in the last fortnight, or the difference of £2,100 on a currency transfer of CAD$200,000. After hitting a 4 year high in the first week of October oil prices have fallen by over 10%, as Saudi Arabia has committed to keep increasing oil output. This highlights the problem that the pound is facing against the Canadian dollar.
As a petro-dependent economy, typically a fall in the value of oil would result in the Canadian dollar weakening against the pound, but owing to the interest rate decision yesterday afternoon the reverse has happened.
Clearly the outstanding issue of Brexit is dominating the outlook for the pound vs the Canadian dollar, and with the interest rate hike yesterday as well as more planned for the future we could see further Canadian dollar strength coming.
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