The Bank of Canada surprised Forex traders on Tuesday as it stated that improved global and domestic economic trends may lead to reducing monetary easing. Traders interpreted the news as a signal that the BoC is ready to raise interest rates sooner than later. As expected, the Canadian dollar rallied on the comments with the USDCAD falling from just above parity to a low of 0.9865. The Loonie outperformance also extended to its fellow commodity currencies as the AUDCAD fell to 1.0255 from 1.0335.
More on the BoC’s Interest Rate Meeting from the Global Winnipeg
A strong signal that Canadians could soon face higher borrowing costs was sent Tuesday as the Bank of Canada indicated it's getting ready to raise interest rates based on improved prospects for the global and Canadian economies.
The hawkish statement took markets by surprise and immediately sent the loonie higher — it closed up 0.96 of a cent at 100.99 cents US.
As expected, the bank kept the trendsetting target rate at one per cent — where it has been since September 2010 — but it was the language in the accompanying statement that caught investors off guard.
"In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term," it said. Read MoreLooking ahead, Forex traders will be looking for further signals that the BoC is serious about raising interest rates. If traders do feel assured of imminent rate hikes, the AUDCAD could be worth watching as the Loonies outperformance of the Aussie could continue as unlike the BoC, the Reserve Bank of Australia has been signaling rate cuts, rather than rate hikes.