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The Canadian dollar soared after the Bank of Canada raised interest rates by 25bp to 1 percent.  This was the third consecutive rate hike from the BoC and has made them one of the most aggressive G20 central banks.  

The tone of the monetary policy statement was not nearly as dovish as some traders feared and therefore the Canadian dollar is trading sharply higher.  Recent economic data may have taken a turn for the worse and the U.S. recovery may be moderating, but Canadian officials are hopeful that consumption and business investment will continue to rise.  As a result, they remain in tightening mode after lifting rates this year from 0.25 to 1 percent.  The BoC reminded us that "financial conditions in Canada have tightened modestly but remain exceptionally stimulative" which can only be interpreted to mean that they will continue to normalize monetary policy over the next few months.  We expect the central bank to raise rates by another 25bp before the end of the year which should keep the Canadian dollar in demand.   

At the same time, it is important to note that "economic activity in Canada was slightly softer in the second quarter than the Bank had expected" and the Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity."  These last words give the central bank the flexibility to take a break from tightening should the recovery in U.S. slow further.  

Focus Remains on Europe

Meanwhile the rest of the foreign exchange market is still focused on Europe.  Overnight, concerns about the true degree of European bank exposure to sovereign debt drove the funding currencies to fresh highs.  The Japanese Yen soared to a new 15 year high against the U.S. dollar while the Swissy reached a fresh record high against the euro before retracing after strong bond auctions suggests that the concerns may be overdone.  There was more than double the amount of demand for Portuguese bonds at today's auctions than available. Despite this cause for relief, the focus will remain on the Europe for the time being.  There is a possibility that restructuring plans for Anglo Irish Bank will be announced today which could weigh on the euro.

Beige Book Up Next

From the U.S., we have the Beige Book report scheduled for release this afternoon. Friday’s non-farm payrolls numbers were much better than expected and suggest that the labor market may be improving. Back to school sales have also been fairly good. Although retailers are relying on discounts to move inventory, tax free shopping weeks in 17 states and more optimism has made Americans more willing to spend this season compared the same time last year. The Beige Book report should acknowledge the pickup in spending and the labor market. However, the tone of the report will most likely remain cautious as the signs of improvement have been recent.  

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.