Canadian Dollar Rallies as Bank of Canada Hikes Rates, Further Tightening Expected

© Reuters.

By Ketki Saxena

Investing.com -- The Canadian dollar reached a four-week peak against the USD today Wednesday, fueled by investors' anticipation that the Bank of Canada will continue to increase interest rates in the coming months after its raised rates 25 basis points to 4.75% in its first hike since January. 

Money markets now expect a roughly 60% probability of an additional rate hike in July and have fully priced in expectations for further tightening by September.

"With more excess demand in the economy than the Bank (of Canada) had previously forecast, a raging hot labour market, and resurging inflation pressures, the Bank decided that the evidence was now sufficiently clear to raise the policy rate and lean against the wind." noted Jay Zhao-Murray, market analyst at Monex Canada. 

"In our view, today's decision is unlikely to be a one and done and we now look for the BoC to hit a terminal rate of 5% on July 12th. With the Fed expected to pause next week, the further narrowing in rate differentials should support CAD in the near-term."

This is a view supoorted by a recent Reuters survey.  conducted among nearly forty currency experts suggests that over the next twelve months, the Canadian dollar is expected to rally as the Bank of Canada keeps rates high. 

The loonie is anticipated to lose some ground over the next three months, with a 0.6% drop to 1.3467 per U.S. dollar. However, it is then expected to recover and rise to around 1:29 in one year's time as per median forecast.

Bolstering support for the loonie today was data statistics indicating that Canada's exports surged by 2.5% in April, reaching record-breaking volumes. 

Additionally, oil prices settled at $72.53 per barrel with an increase of 1.1%, encouraged by Saudi Arabia's unexpected commitment over the weekend to reduce production output and as China is expected to implement more stimulus measures into its economy.