Canadian dollar soars on ‘panic rally’ as central bank hikes interest rate

TORONTO — The Canadian dollar is soaring to levels not seen in nearly a year after the Bank of Canada announced it was hiking its key lending rate for the first time since 2010.

The loonie was trading at 78.70 cents US about four hours after the central bank’s announcement Wednesday, up more than 1.31 cents from Tuesday’s average price of 77.40 cents US. The last time the loonie had closed above 78 cents US was in August 2016.

Eric Theoret, a currency strategist and director at Scotiabank, says although the markets had been anticipating a rate increase from the bank, it was not expecting Bank of Canada governor Stephen Poloz to express so much confidence about the move.

“The expectations were for a dovish hike, which would’ve been seen as the consensus heading into this,” he said. ”And really what we had was a very confident, almost hawkish hike in that sense.”

Theoret says the markets were also largely forecasting that the bank would hint that it would reverse rate cuts it put in place in 2015 to help the Canadian economy deal with a plunge in oil prices, and then enter a wait-and-see mode before making any more moves.

But what it is now reading from the central bank is that any future decisions will be data-dependent, and the current economic figures show that the Canadian economy is well on a road to recovery.

“The overwhelming tone that we got today is that they’re very intent on a tightening path,” he said, noting that investors have now entered into a “panic rally” because of the move.

The dollar has strengthened in recent weeks, buoyed by positive economic data, and growing anticipation of the interest rate hike. It raised the rate by a quarter of a percentage point on Wednesday to 0.75 per cent, still low by historical standards.

Theoret says the loonie still has room to move higher, with the growing possibility that it will eclipse 80 cents US in the near term. The last time the loonie closed above this level was in June 2015 when it was 80.06 cents US.

In equities, the Toronto Stock Exchange’s S&P/TSX composite index was up a moderate 30.33 points at 15,179.47 in mid-afternoon trading after climbing more than 100 points shortly after the central bank decision at 10 a.m. ET. The index was led by gains in Canada’s energy and consumer staples sectors.

In New York, the Dow Jones industrial average was up 126.99 points at 21,536.06 and the S&P 500 index was ahead 17.99 points at 2,443.52. The Nasdaq composite index climbed 61.26 points, or about one per cent, to 6,254.56.

Federal Reserve chairwoman Janet Yellen kicked of two days of testimony in front of Congress Wednesday, telling legislators that the U.S. central bank expects to keep raising a key interest rate at a gradual pace and also plans to start trimming its massive bond holdings this year.

In her semiannual testimony on the economy, Yellen noted a number of encouraging factors, including strong job gains and rising household wealth that she said should fuel economic growth over the next two years.

Many economists believe the Fed, which has raised rates three times since December, will hike rates one more time this year.

In commodities, the August crude contract was up 72 cents to US$45.76 and August gold was up $5.80 at US$1,219.40 an ounce shortly after 12 p.m. ET.

The September copper contract was up one cent at US$2.68 a pound and August natural gas was down seven cents to US$2.98 per mmBTU.

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