Bank Of Canada Hikes Rates To 1.25%; Gold Priced In CAD Jumps

USD/CAD Daily Fundamental Forecast – January 18, 2018

The Bank of Canada raised interest rates on Wednesday, as expected, as job growth and firmer inflation outweighed the cloud of NAFTA uncertainty, but the head of the central bank admitted the decision was not a no-brainer.

The central bank said while higher interest rates would be justified "over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target" close to two percent.

"We had thought that the stagnation of the economy net-net since the two rate hikes in Q3 (judging from the monthly GDP readings), signs of softness in house prices in Toronto and Vancouver areas, coupled with the strength of the Canadian dollar and NAFTA uncertainties would have removed any sense of urgency from the central bank", analysts at BBH wrote in a note to clients.

Ever since President Trump won the United States presidential election in November, this was the first release of the current predictions and extensive economic valuation by the Bank.

Uncertainty around USA trade policy and recent tax reforms south of the border are expected to knock about 2.5 percent off business investment in Canada over the next two years, the Bank of Canada said on Wednesday. The statement explaining the Bank of Canada's rationale and its economic outlook, however, contained its most explicit assessment to date about the negative fallout from Nafta's uncertain future.

"Business investment has been increasing at a solid pace, and investment intentions remain positive", the bank said.

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The Canadian dollar weakened modestly after the hike as investors realized that markets may have gone too far in pricing in more or faster rate hikes than the bank is contemplating. There are still a lot of concerns worrying the BoC, including uncertainty around NAFTA negotiations, rising household debt levels and tighter stress tests for uninsured mortgages introduced this year.

The bank said speculation the United States may pull out of the deal is already holding back business investment in Canada and it poses a threat to future exports. He alluded to other reports that, focusing on a change in tariff rates, have predicted the death of Nafta would have only a modest impact.

The federal court in Manhattan is home to a wide variety of private litigation accusing banks of conspiring to rig rate benchmarks, markets such as U.S. Treasuries, and prices for commodities such as gold and silver.

The February gold contract was up US$2.10 cents to US$1,339.20 an ounce and the March copper contract was down three cents to US$3.19 a pound.

The threat of greater protectionism remains the most significant risk to Canada's export-dependent economy, the bank said. On the other hand, the bank predicted that Canada will see a small benefit from the recent US tax changes thanks to increased demand.

"But as long as the data continues to come in as it's been doing, steadily improving" she said, "we are going to see more rate hikes".

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