Canadian Dollar Weakens As BOC Rate Hike Buzz Fades

The Canadian dollar is trading slightly lower on Monday as the buzz from the Bank of Canada (BOC)’s recent increase to interest rates has ostensibly faded. Investors will comb through various reports and forecasts pertaining to the national economy in both the short- and long-term until important data is published. It did not help with energy prices tumbling to start the trading week.

Last week, the central bank raised rates by 25 basis points, from 1.5% to 1.75%, meeting market expectations and showing that the BOC is beginning to normalize monetary policy. The loonie received a significant boost, but it has fallen flat since then, unable to maintain the momentum. Money markets now anticipate the next rate hike in January.
With higher rates, there are concerns that rising mortgage rates will dampen the economy and cool down the housing market. Prior to the recent string of rate hikes, homeowners paid more than $9 billion in interest, and they are projected to spend even more next year. The BOC believes this will persist for many years to come, writing in its autumn Monetary Policy Report:

While policy measures have been effective in reducing household vulnerabilities, the sheer size of the outstanding stock of debt means that the vulnerability associated with elevated household indebtedness will persist for some time.

Meanwhile, Morgan Stanley is also sounding the alarm on debt, warning that a combination of rising rates, weaker credit growth, and tumbling house prices could limit Canada’s ability to weather the economic storm.

These economies now face a crucial juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, and global financial conditions tighten, increasing the consumption drag from debt service and rising savings.

But the federal government believes it can handle an economic slump, despite the ballooning budget deficit and surging debt levels. Finance Minister Bill Morneau told reporters after it was reported the federal debt-to-gross domestic product (GDP) ratio is 30.4%:

The Canadian government is carrying the lowest amount of debt to those comparable economies so that puts us in a position where should we find ourselves for whatever reason to need to demonstrate that resilience, we have the capacity.

Crude oil, a major exporting commodity for the Canadian economy, slipped. December West Texas Intermediate (WTI) crude futures shed $0.43, or 0.64%, to $67.16 per barrel on the New York Mercantile Exchange. Oil prices are poised to post a monthly decline of 10%.
The USD/CAD currency pair rose 0.12% to 1.3118, from an opening of 1.3102, at 14:00 GMT on Monday. The EUR/CAD fell 0.13% to 1.4920, from an opening of 1.4939.

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