Breathtaking move in the Canadian dollar after the Bank of Canada hike

Bank of Canada leapfrogs Fed, other central banks on rate hikes

"The Bank of Canada took the fast lane in returning rates to 1.0%, hiking 25bp when most were expecting a hold until October".

The Bank does not seem overly concerned with the Canadian dollar and stated that the strength reflected "a weaker USA dollar against many major currencies" and "also reflect [ed] the relative strength of Canada's economy". Since slashing rates because of the global financial crisis dubbed the Great Recession that ended in 2009, central banks have been closely watched for interest rate hikes as a signal that nations are healing from the financial collapse almost a decade ago.

Higher interest rates offer lenders in a given economy a better rate of return compared to other jurisdictions.

Toronto-Dominion Bank's CEO Bharat Masrani also said rising rates would be good for his bank, Canada's second-biggest lender, as long as they proceed at a moderate pace. Traders had assigned about a 40 percent chance of an increase.

The Bank of Canada statement said future rate decisions were "not predetermined", and would be guided by incoming economic data and financial-market developments.

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"That can't be what the [Bank] wants to see, especially given the recent widening of the trade and current account deficits", BMO economist Benjamin Reitzes had written in a note to clients this morning, prior to the rate announcement.

"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broadly-based and self sustaining", reads a statement from the central bank. "While an argument could be made that holding off a few weeks for the opportunity to more fulsomely explain how the outlook for the economy has evolved, this clearly did not hold sway in Ottawa today".

"That was possible when housing prices were rising rapidly and interest rates were at record lows".

Looking ahead, at 2:00 pm ET, U.S. Federal Reserve releases Beige Book report. There has also been more widespread strength in business investment and in exports. Nevertheless, there is still some slack in the labour market while wage and price pressures are still more subdued tan historical relationships would suggest.

The bank said there remains "significant geopolitical risks and uncertainties" around worldwide trade and fiscal policies that have weakened the US dollar. Any adjustment will eventually be reflected in the price of loans to consumers and businesses, while having a direct influence on the variable-rate mortgage loans and the exchange rate of the canadian dollar.

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