The Canadian dollar jumped more than 1% against the U.S. dollar as Canada's central bank left its rates unchanged amid uncertainty around U.S. trade policy, but signaled a possible rate hike in the near term.
The Bank of Canada maintained its target for the overnight rate at 1.25% and left the bank rate and deposit rate unchanged at 1.5% and 1.0%, respectively.
The Canadian dollar jumped 1.23% versus the U.S. dollar as of 11:43 a.m. ET.
The central bank said inflation, which has been close to the 2% target, is likely to rise in the near term primarily due to rising prices for gasoline. "The Bank will look through the transitory impact of fluctuations in gasoline prices," the bank said.
The bank also said the economic activity in the first quarter came in stronger than expected, with economic data supporting a 2% growth outlook in the first half of 2018.
However, the bank acknowledged ongoing uncertainty about trade policies and the rising oil prices. "[O]ngoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies," the central bank said. "Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments."
The central bank's Deputy Governor Lawrence Schembri recently said the interest rates were low due partly to uncertainty around U.S. trade policy, suggesting that a resolution of negotiations over the North American Free Trade Agreement could open the way for higher rates.
Given the deadlock in negotiations, with a number of key sticking points, the chance of a NAFTA agreement over the next few days or possibly weeks appears to have diminished, ING said. Assuming a deal is reached, which is possible, and the economy continues to perform better, the Bank of Canada is expected to hike twice in the second half of the year, potentially starting in July.
The exemption on U.S. steel and aluminum tariffs given to Canada and Mexico is due to end June 1.
"Developments since April further reinforce Governing Council's view that higher interest rates will be warranted to keep inflation near target," according to the central bank. "Governing Council will take a gradual approach to policy adjustments, guided by incoming data."
