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The US interest rate increase and your business

The US interest rate increase and your business

Posted on: December 15, 2017 | Author: Mark Engelking, ATB Foreign Exchange Trader

For Canadian business owners who work on both sides of the border, the recent quarter per cent interest hike by the US Federal Reserve likely raised questions about their foreign currency strategy.

The anticipated boost of the US benchmark rate to 1.5 per cent signaled business as usual for a central bank committed to steadily raising interest rates over the next two years as its economy grows. The big question is whether the Bank of Canada will follow its lead, and raise its own rate in early 2018.

I believe a move to stay in step with Canada’s biggest trade partner by increasing borrowing rates in January would likely have a somewhat positive impact on the loonie, compared to the US dollar.

Our central bank has emphasized its policies are being driven by data, so indicators of a growing economy such as strong retail sales numbers, CPI and GDP results for December could prompt the bank to scale back the monetary stimulus.

“If the Bank of Canada gets the necessary strong data to back up an increase in interest rates, you could see the Canadian dollar strengthen,” said ATB's Director of Foreign Exchange and Interest Rates Janek Guminski. "If business owners have no deadline on their purchases, they could potentially see better rates in the New Year.”

Barring unexpected data next week from Statistics Canada and other external pressures such as commodity prices, ATB FX sees the Canadian dollar staying within a $1.27-$1.29 range against the US dollar over the holidays.

The Federal Reserve’s hike in December prompted little reaction from traders and investors as it had already been priced into the market. And there were no surprises in retiring Chair Janet Yellen’s last report to the public, where she stayed on her path of gradual rate increases. The new year will be another story, particularly as new Federal Reserve Chair Jerome Powell steps in.

If the Bank of Canada keeps its rate on hold because of continued uncertainty over trade and soft exports, along with lower than expected inflation, the Canadian dollar could weaken against its US counterpart, particularly if the Federal Reserve bumps up its rate again in the spring, as it continues toward its long-term projection of a three per cent overnight rate by 2020.

The Bank of Canada increased interest rates in July and in September 2017 due to a stronger economy, but kept the overnight rate steady in December. In a speech to the Toronto Chamber of Commerce a day after the US rate hike, governor Stephen Poloz cautioned that while Canada’s economy was in a “sweet spot” with most companies running at full capacity and inflation expected to reach two per cent later in 2018, there were still uncertainties—and room to grow.

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