Chinese Rate Hike Hurts the Canadian Dollar

8 Feb 2011 at 3 PM - Written by John Cameron

STORY LINK Chinese Rate Hike Hurts the Canadian Dollar

The Canadian Dollar has lost ground against the 16 most-traded currencies following China’s decision to raise its interest rates for the third time since October, 2010.

The People’s Bank of China announced that its headline 12 month lending rate will increase to 6.06 percent from 5.81 percent, as of tomorrow. The one-year deposit rate is set to increase to 3 percent from 2.75 percent.

Last night’s Chinese rate decision served to dampen the demand for growth-based assets, particularly hurting the price of crude oil, which was down by 1.5% at one point during the European session. By Tuesday lunchtime UK time, Crude had traded down to its lowest price for over a week.

The Canadian Dollar has trended upwards against the US Dollar since the start of last September, strengthening from 1.0650 to trade at 0.9900 on the InterBank market today. These gains have been largely attributable to the rally in Crude Oil which has taken place over the same period. Although oil prices have dipped on the day, many analysts predict that oil prices are set to continue their bull run as economic indicators provide further evidence that the world economic situation is improving.

The early part of the week has seen the release of two sets of second-tier housing market data which came in broadly in line with expectations. Friday afternoon’s International Merchandise Trade figure for December will provide some indication as to whether the recent strengthening of the Canadian Dollar has hurt Canadian Exports. This figure apart, Canadian Dollar strength is likely to continue to be determined by price action in Crude Oil markets.

TAGS: Canadian Dollar Forecasts