The Bank of Canada voted this morning to leave interest rates at 0.25% but strongly hinted that interest rates would increase sooner than expected because of the strong economic growth and the fear of inflation. For over a year, the BoC has indicated that rates would remain low until at least July 1. Today’s policy statement indicates that June 1 is likely the date rates will begin to rise.
The policy statement issued by the BoC included the following, “With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.” With this statement, the BoC removed a commitment made several months ago to keep interest rates at current levels through the middle of the year.
Although this policy shift was widely anticipated by financial traders, the USD CAD plunged sharply and closed in a position to take out the recent main bottom at .9952. Traders feel that the improving economy and likelihood of additional rate hikes during the next few months should keep upside pressure on the Canadian Dollar.
The U.S. Dollar finished mixed, posting gains versus the Euro, Swiss, and Japanese Yen while struggling against the British Pound, Canadian Dollar and Australian Dollar.
The EUR USD remained under pressure on concerns the recently approved European Union rescue package will not be enough to stem the financial slide in Greece. Borrowing costs continue to plague Greece with the cost of debt eating up much of its cash flow. The spread between Greek Bonds and German Bunds remains wide indicating that investors believe an investment in Greece is a high risk proposition. Some European Union members are already anticipating the possibility of another bailout proposal.
The British Pound surged to the upside this morning following the release of better than expected Consumer Price data and managed to hold on to a portion of its gains despite numerous attempts to push it lower.
Today’s CPI figure sent a signal that the Bank of England is likely going to pass on an increase in its quantitative easing program at its next meeting in May. The increase in inflation came as a surprise to the central bank as well as market participants because the BoE has been warning about the possibility of deflation.
Gains were most likely being limited on Tuesday by election concerns. Many traders feel this market is not likely to trend until after the May 6th election. Furthermore, traders are still worried the election will result in a hung parliament which will make it difficult to pass legislation to curb the wide U.K. budget deficit.
Stronger demand for higher risk assets helped to drive the USD JPY higher. Signs that the global economic recovery is back on track encouraged investors to take on more risky assets like gold, crude oil and equities. Tension over the Goldman Sachs fraud charges eased enough to draw investors back into higher yielding assets.
The weaker Euro helped trigger a strong rally in the USD CHF. Traders are anticipating more intervention by the Swiss National Bank in an effort to protect the currency and the Swiss export market.
The AUD USD was up sharply on renewed talk of another interest rate hike by the Reserve Bank of Australia in May. The RBA’s minutes released early Tuesday morning indicated that policymakers are concerned about inflation because of increasing demand for Australian exports. Tuesday’s rally erased much of the recent break that was triggered about a week ago when the government reported fewer mortgage applications.
The NZD USD struggled throughout the day after an early rally. The initial move to the upside today was triggered by the strong Aussie Dollar. Traders are currently assessing the odds of an interest rate hike by the Reserve Bank of New Zealand. The first sign of a rally will be a close over .7124. A strong acceleration to the upside is likely to occur following a trade through .7199.
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