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If you’re planning a summertime trip to the U.S., keep a close eye on the loonie next Wednesday. That’s when the Bank of Canada is widely expected to increase interest rates, a move that generally attracts foreign investment and boosts demand for a currency, pushing that currency’s value higher.
“There’s still room for the Canadian dollar to gain,” said Adam Button, a currency analyst with ForexLive.com. Button expects the loonie to head close to 78 cents after an interest rate hike, and as high as 80 cents over the following month.
Currency traders started gaining confidence that the bank would finally pull the trigger on interest rates after reading bullish remarks in a speech by Bank of Canada senior deputy governor Carolyn Wilkins on June 12, said Button.
“It’s just going to be a question of how the markets interpret what the bank tells us,” said Osborne. “If there is an indication in the statement that another rate increase is going to come through fairly quickly … or if, on the other hand, the bank suggests that they’re in no particular rush to raise interest rates again.”
Karl Schamotta, director of global market strategy at Cambridge Global Payments, believes the Canadian dollar could fall in value on the announcement of an interest rate increase, possibly below the 77-cent mark.
Schamotta also expects the Bank of Canada’s accompanying statement to take a cautious tone, reducing upward pressure on the Canadian dollar by kicking expectations for the next interest rate hike down the road.
“They’re very unlikely to telegraph the second hike immediately after the first one,” he said.
“I doubt that the Bank of Canada is just going to hike rates once. I think that what they’re likely to do is take back the two emergency rate cuts in 2015, because they didn’t unveil one rate cut back then, they did two,” said David Rosenberg, chief economist at investment management firm Gluskin Sheff.
“So the name of the game is to take back those emergency cuts, because the emergency is well into the rear-view mirror.”
“I think the bank is clearly of the view that the economy has moved into a sufficiently solid state that it can withstand a rate hike and the firming in the Canadian dollar that we’ve already experienced,” said Rosenberg.
Not everyone is convinced that the Bank of Canada will hike rates out of optimism, though. Schamotta said the central bank could raise interest rates to put the brakes on Canadians’ love of borrowing money.
So rather than an interest rate hike reflecting “the light at the end of the tunnel,” Schamotta said, “it may be the train.”
“One day the correction will come in Canadian housing, and one or two rate hikes brings that day ever closer,” he said.
If Canada’s housing market does begin to unravel as a result of higher interest rates, all bets on the Canadian dollar are off.