Bank of Canada predicted to hike rates (Daniel Johnson)

GBP EUR Exchange Rate: Weekly Review July 16  

Is a Rate hike justified by the BOC?

This afternoon is the Bank of Canada (BOC) interest rate decision. The expectations are that there will be a hike from 1% to 1.25%. Bank of Canada Governor, Stephen Poloz has stated a change in interest rate would be data dependent. If this is the case then  a rate hike should occur today. We have recently witnessed the best unemployment data in four decades.

Personally, I am of the opinion a rate hike in the current climate is risky. Donald Trump has stated he is far from happy with the North American Free Trade Agreement (NAFTA). Trump feels it is not beneficial enough for the United States and renegotiations are already under way. Trump’s demands are considered unrealistic by some and talks have been problematic. Mexico and Canada are both heavily reliant on the US buying their goods and any potential change could have a significant impact on their economies.

Trump has also stated he could scrap the deal altogether which could be catastrophic for the Canadian economy, if there is one thing the markets do not react well to it is uncertainty and if the deal is scrapped I would expect the Canadian Dollar to weaken significantly. The exchange moves on rumour as well as fact and usually an anticipated rate hike would cause the currency in question strengthen substantially. This has not been the case on this occasion and I think this could be down to the NAFTA situation.

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