Canadian dollar climbs on hawkish central bank comments; pound wobbles
The Canadian dollar rose to its highest level in nearly two months on Tuesday after its central bank hinted interest rates could rise sooner than anticipated, while worries about UK political uncertainty dented sterling.
The dollar index, which tracks the greenback against a basket of six major rivals, last traded at 97.245, staying above a seven-month low of 96.511 set last week.
At one point, the Canadian dollar was at its strongest since April 17, at C$1.3274 CAD=D3 per U.S. dollar, extending gains after climbing more than 1 percent on Monday. The loonie last traded at C$1.3293, up around 0.2 percent on the day.
Bank of Canada Senior Deputy Governor Carolyn Wilkins said on Monday first-quarter growth was “pretty impressive” and that signs economic growth was broadening would lead the central bank to consider whether current low rates would still be required.
“She delivered a much more hawkish signal than we’ve seen from the central bank in some time,” said Sue Trinh, head of Asia FX strategy for Royal Bank of Canada’s Hong Kong branch.
“Bottom-line, odds of a rate hike by the end of the year from the Bank of Canada have moved up considerably,” Trinh said, adding that markets were now pricing in more than a 50 percent chance.
Sterling was still looking wobbly after the shock result of Thursday’s UK general election, which left Prime Minister Theresa May short of a parliamentary majority that would have strengthened her hand as Britain prepares for Brexit negotiations with Europe.
The pound eased 0.1 percent to $1.2653 GBP=D3, after shedding 2.3 percent the previous two trading days.
“The prospect of further political uncertainty due to the lack of an overall Conservative majority is likely to weigh on sterling in the short term,” said Jeremy Gatto, senior vice president, trading, for Geneva-based boutique asset manager Unigestion.
On the other hand, the potential for “softer Brexit” rhetoric in a market that is already short on sterling could help support the currency over the medium-term, Gatto added.
The greenback was steady to firmer against the yen and the euro ahead of the Federal Reserve’s two-day policy meeting starting later on Tuesday.
Against the yen, the dollar held steady at 109.97 JPY=. The euro EUR= eased 0.1 percent to $1.1193.
With the U.S. central bank widely expected to raise interest rates, investors’ focus will be on any fresh hints on the pace of tightening in the months to come, and its assessment of the economy and outlook on inflation.
Investors will also be watching for any fresh details on the Fed’s plans for trimming its balance sheet.
Elsewhere, the Bank of England is set to announce an interest rate decision on Thursday, and the Bank of Japan holds a policy meeting on Thursday and Friday.