Following its latest policy meeting, the Bank of Canada increased interest rates by 0.25% to 0.75%. There had been a steady shift in expectations during the past month with a majority of investment banks expecting rates to be increased at this meeting.
Nevertheless, this was the first rate increase since 2010 and the Bank of Canada is only to second major central bank to sanction an increase in rates during the past five years.
The central bank was significantly more confident surrounding the economic outlook and also expected that inflation would gradually increase and reach the 2% target before mid-2018.
The level of interest rates and changes in central bank policies remain a key driver of currency rates.
Changes in interest rates are always important and the impact is particularly crucial at turning points in the interest rate cycle. When interest rates are increased after a period of very low rates, this tends to have a substantial impact on expectations and currency rates.
The Canadian Dollar strengthened sharply after the decision with the bank also optimistic surrounding the outlook.
USD/CAD declined to fresh 10-month lows near 1.2700 and compared with a level above 1.3700 around two months ago. GBP/CAD also moved sharply lower to the 1.6400 area.
The Canadian currency is likely to maintain a firm tone in the short term, but gains are likely to slow. Investors who need to buy Sterling against the Canadian dollar should look for opportunities close to the 1.62 area.
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