Canadian dollar posts near one week high ahead of potential rate hike

CANADA FX DEBT-C$ posts near 1 week high ahead of potential rate hike

The Bank of Canada raised its official cash rate by 25 basis points to 1.25%, in a move that was widely expected by the market.

Led by RBC, all of the big banks have now hiked their posted rates since last week by up to 20 bps on fixed terms.

The complaint, filed by a Colorado pension fund in U.S. District Court in Manhattan late on Friday, accused Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO) and the other banks of suppressing the Canadian Dealer Offered Rate (CDOR) from August 9, 2007, to June 30, 2014. "However, the uncertainty surrounding the future of Nafta is clouding the economic outlook".

The claim alleges the banks manipulated the Canadian dealer offered rate - which reflects what rate contributors are willing to lend to corporate clients using an instrument called a bankers' acceptance - from at least August 9, 2007, to June 30, 2014. "If you're very, very close on your monthly budget if rates are to rise by a quarter of a per cent and you couldn't afford, let's say a $36 shift in your payment, perhaps your numbers are a little bit too tight to be purchasing that house".

The big questions are how quickly do they continue moving up from here, how closely will they follow USA increases and where will rates settle.

This is the third rate hike in just sixth months by the central bank and follows December's impressive employment report.

For 2017, it's now predicting three per cent growth, as measured by real gross domestic product, compared with its 3.1 per cent prediction in October. Previously the bank was anticipating 2.1 and 1.5 per cent growth.

However, the BoC sounded its deepening concerns that a breakdown in trade relations with the USA and Mexico could de-rail the Canadian economy.

As Canada's economy benefits heavily from its close trade ties to the U.S., the USA pulling out of NAFTA could have a major effect on Canadian imports and exports.

"I believe it would be net negative for both Canada and for the US", he said of the theoretical demise of NAFTA, "but to actually quantify that is very hard, because every sector is affected differently". The bank expects exports to get a 1 percent boost by the end of 2019 due to the tax reforms. But dark clouds on the trade horizon had many watchers downgrading their expectations.

The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent.

The central bank estimates the economy grew 3% past year, and is expected to expand 2.2% in 2018.

Economist Frances Donald with Manulife agrees with that assessment, telling CBC News in an interview that while the market was expecting as many as three hikes this year, the situation is fluid. Developments in Poloz's list of areas to watch, including interest rate sensitivity, labour market developments, and inflation dynamics could easily bring the next hike forward, or push it back.

"I know interest rates went up but they're still historically low".

How much is left on your mortgage? The bigger the gap between the actual rate and the neutral rate, the more stimulative the current policy.

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