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Canadian dollar ends down after bank rate hike

TORONTO: The Canadian dollar closed down slightly on Wednesday after the Bank of Canada played a predictable game of follow-the-leader and raised interest rates one day after the US Federal Reserve.

"It was awfully quiet. The market was totally priced in the Bank of Canada this morning," said Steven Butler, director of foreign exchange at Bank of Nova Scotia.

He said the market is still trying to push the Canadian dollar a little weaker, but there was a lack of momentum.

"It's been a tough market for getting momentum going after the sharp sell-off last week," he added.

The Canadian dollar closed at C$1.4695 (68.05 US cents) on Wednesday versus C$1.4690 (68.07 US cents) at the previous session's close.

Without much fanfare, the Canadian central bank raised its benchmark bank rate by 25 basis points to 5.50 percent on Wednesday, as expected following the Fed's decision one day earlier.

Immediately following the rate hike announcement at 9:00 a.m. (1400 GMT) on Wednesday, the dollar changed little, only moving from C$1.4692 to C$1.4693.

The Canadian currency remained flat throughout the day, unable to gather any momentum, and hovering in a range around C$1.4690.

Instead of focusing on Wednesday's bank rate hike, market watchers were more concerned about the future.

Economists agreed the central bank's decision was not a big surprise, but warned the currency will likely not rally soon.

Butler said the currency may be able to appreciate once technical issues such as Japanese repatriation of Canadian dollar assets is cleared up.

"The fundamentals are still really strong," said Butler.

He said corporate flows were responsible for driving the Canadian currency weaker.

Economists are divided about the direction the Canadian central bank will take in relation to its US counterpart in the coming months.

"There's enough going on here to support tighter policy. There is a fairly healthy economic expansion that should be able to withstand a couple of taps on the brakes," said Warren Lovely, an economist at CIBC World Markets.

"The bank has always been vigilant in defending the economy from a real inflation threat to the extent that if they see inflation pressure building, they'll be quick to act," he added.

Analysts predict the Bank of Canada will match the Fed if the US central bank ups rates again at its May 16 meeting, but the bank's response to subsequent US hikes is an open question.

"The bank will continue to insist that its policy decisions are independent of what's going on south of the border," said Lovely. "But, really, in fact, the Bank has really found itself in a situation now where if it wants to defend the value of the dollar it's going to be forced to match the Fed."

Canadian retail sales for January could affect the currency on Thursday, but traders said they do not expect economic indicators to have a significant impact on the market.

"I think the market is looking for inspiration and it's just not finding it right now. Hopefully, once we get through the end of this month, we can get some sort of trend going," said Butler.

In cross-trading against major currencies, the Canadian dollar was at 72.83 yen and at C$1.4117 against the euro. The Canadian dollar was at A$1.1250 against the Australian dollar.-Reuters